Real estate has emerged as one of India's fastest growing sectors, with a 30% annual growth rate. Post liberalization of FDI norms the industry has seen tremendous international interest. The industry is now going through some radical changes, and the pace of adoption of global best practices across various aspects of the real estate development process has significantly accelerated. The supply-demand disconnect is rapidly evaporating and there is emphasis on providing not only a high quality product across asset classes i.e. residential, commercial, retail, etc. but also on providing a great customer experience. With real estate now attracting top B-school talent, and with global funds/developers coming to India, the industry is set to create huge opportunities. For the entrepreneur this fast-growing industry throws up several opportunities at various stages of the real estate development life-cycle - from land acquisition to construction and from sales & leasing to post-occupation and property management.

A panel of experts from the Indian real estate industry discussed the current scenario and the outlook of the industry and the potential growth avenues.

The discussion was moderated by none other than Prakash Gurbaxani, Founder of QVC Realty. It was a surprise for everyone to know that Prakash Gurbaxani, the doyen of the BPO industry in India, is also a real estate veteran. Between 1984 and 1997, he had worked in various senior management positions in the construction industry in the United States.

Prakash began the discussion with his opening remarks, "We will deal with the much loved question "Is there a bubble building up in real estate?" very much later. To begin with, let us grasp the Indian real estate sector and compare it with the global picture. Every industry that got deregulated in India, has got competition, has got supply-demand balance and seen immense growth in the past decade. The opportunities in real estate are just becoming obvious to us."

While we are amazed at the growth we have witnessed in the past few years, we really have a long way to go to reach the global average. For instance, while we feel that the housing loan segment is cooling down, it is just 5-15% of the entire country's GDP, when compared to the much higher share in the western world. The largest ever IPO of Rs.9,168 crore offered by DLF had made the world take notice. However, real estate stocks still constitute just 4.2% of the total Indian equity market, while the global average is 15%. The figures listed speak for themselves: 

                                               
Speaking about his own venture, Prakash said "Today the market is becoming mature where we find private equity investors are ready to back us with funds, even when we have no land to develop. Similarly, Blackstone Real Estate Partners, invested $18 million for a minority stake in Bangalore-based Synergy Property Development Services. Apart from numerous websites, we now have dedicated 24 hour real estate TV channel."

Manoj Namburu, Chairman & Managing Director of Alliance Group depicted the emerging image of real estate sector which will redefine the Indian landscape. Residential property segment is nearly 80% of the total real estate market and still a large population is left out. The cost of a typical budget house is still unaffordable to the majority of the population who are desperate for a house. The National Urban Housing & Habitat Policy 2007 has identified a short supply of 24.7 million houses in the country.

Builders have focussed on premium housing segment to grab a larger profit margin leaving behind a large latent demand in the middle and low cost housing segment. There is a need to eliminate non-essential frills. At today's prices, a typical 1000-1200 sq ft house is priced at Rs.25-40 lakh which is way beyond the reach of the common man.

SRZs for low cost budget housing

Manoj suggests that though low cost housing has very low profit margin, the cash flow would be pretty fast. Hiranandani Group has proposed a 25,000 housing colony at Rs.2 lakh for 250 sq ft individual house. In a joint venture with the West Bengal government, Shapoorji Pallonji & Co. Ltd will be constructing 20,000 apartments in Kolkata on 150 acres of land named ‘Shukobrishi'.

The government is considering a proposal from real estate developers to set up Special residential zones (SRZs) outside the main cities. These SRZs are proposed to have large scale housing colonies of 4000-5000 houses, which can be built at an affordable price enabled by tax benefits and single-window clearance.

Developers are holding on to their prices right now and watching the interest rates and inflation trends. With the recession setting in, registration of properties has dropped by 33% over last year. The main target group for housing loans are the IT/BPO professionals who take the lion's share of 70%. Since most of them already own a house or even two, the market is reaching a saturation point. Over supply of built-up space is happening both in residential as well as commercial segments. The figures are depicting a gloomy scenario ahead: 

Manoj is hopeful that the arrival of Real Estate Mutual Funds (REMF) can bring in the much needed funds to the small investors. The central government has approved the creation of Information Technology Investment Regions (ITIR), which can bring in employment opportunity and economic growth in the targeted areas. Such infrastructure projects are getting relaxed lending norms from the RBI as well as increased public-private partnership.

Smart homes with real value:

J C Sharma, Managing Director of Sobha Developers had a major difference of opinion though. He said, "I feel no one really likes this concept of low cost budget housing; everyone prefer to have certain basic amenities in their houses. Moreover the right location matters the most in real estate. You cannot have a beautiful residential layout way beyond the city outskirts. Easy access to work is as crucial as the house itself. Otherwise everyone would have preferred to live in the villages and come to work in the cities!

If we create a budget housing concept, it would become like Air Deccan which was a nice concept that could not sustain itself and got sold out to Kingfisher Airlines. Today at an exorbitant labour cost of Rs.500-600 per sq ft, it is uneconomical for a builder to bring down the cost. Sub-contractors who control the labourers are complicating the supply chain. So mechanisation of construction techniques has to happen and technology can play a big role in giving a better deal for both the buyers as well as the sellers.

Standardisation of construction techniques is badly needed in the industry. While builders are dealing with square feet, flooring tile makers work with square metres.

Technical training of both skilled and unskilled labour is the need of the hour. In the western world, construction industry deals with only professionals who are well trained in their specialised skills. In India, we have craftsmen who come from traditional caste based system.

There is a need for a Smart Home concept which is all about reasonable resale value, compact yet comfortable space and quality of amenities. Sharma felt that that the image of a developer is not much reputable at present; if someone knows how to get approvals from the authorities, they are qualified as developers! With literally no entry barriers, real estate is promoted as the safest investment that can only appreciate. However the industry's business ethics are as good or even better than others. For instance, if the normal credit period between a supplier and buyer is 45-90 days in any other industry, it is 30-60 days period in construction.

So to restore faith, there is a need bring in regulatory framework covering all aspects of the construction industry. The buyers need raise their awareness about building quality, legal guidelines and other aspects.

Excerpts from the panel discussion organised by  TiE Banglaore on "Indian Real Estate Industry - Outlook & Opportunities"   

Compiled by Levine Lawrence for Businessgyan

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