India Real Estate Report - König & Cie. Asia Advisors

Introduction

The India Real Estate Report is assembled by the real estate specialists of König & Cie. Asia Advisors, providing background information that offers an intriguing insight into the development of India. Especially in the consistently emerging nation of India, with a population of 1.3 billion people, there lies enormous market opportunities. Tobias König, founder and company manager of König & Cie. GmbH & Co. KG, confirms: "Gigantic investment potential exists in the area of infrastructure alone. For the expansion of streets, train connections and harbors, billions are required in these next years. In order for a German business to participate in this dynamic development and promote this expansion, it must be both readily present and available and also well-integrated with the know-how of Indian colleagues." With a branch in Mumbai, India, KC Asia Advisors has optimal insight, especially into investments in the real estate sector.

• The Indian real estate market is showing signs of recovery which is restricted to the housing sector end users, but that leads to an optimistic mood. Mainly in the last 2 to 3 months condominiums were increasingly sold. The average selling rate was approx. 50% lower than its peak during the boom. But also for this segment the prices increased from 5% to 15%. The current real estate prices are up to the real estate prices of mid 2006. The main reasons for the latest demand are fiscal measures: stimulus packages, softening of interest rates and ensuring availability of liquidity. Another reason for rising demand is Pan-Indian price reduction in-between 15% to 35%, caused among other things by increased land supply and finished products, revision in specifications of buildings by developers, and increase in number of floor space.

• The Federation of Indian Chambers of Commerce and Industry (FICCI) prognoses a climb in demand of 30% for the residential sector until end of 2009. More than a third of demand relates to "affordable housing" with price ranges between Rs 5 and Rs 15 lakh per flat. 26% of consumers are interested in flats between Rs 15 and Rs 25 lakh; 22% for flats between Rs 25 and 40 lakh. 12% of demand relates to flat with purchase prices among Rs 35 and Rs 50 lakh. Only 6% of consumers are interested in flats which cost more than Rs 50 lakh.

• The market for commercial and retail real estate did not change for the better. The FICCI prognoses a recovery at the end of 2010 at the earliest.

• The Developer’s situation did not change significantly, too. Finance conditions are still bad. To cover their debt services, they have to rely on the cash flow generated by selling the housing units. For developers it is still very hard to get fresh money from banks for new projects.

  Because of the newly built Bandra-Worli-Sea-Link, which should ease the traffic flow from north to south Mumbai, price escalations for properties in sea link area are being expected between 10% to 15%. More details will be known in approx. 6 months at the earliest.

• Most nationwide developers withdrew from Tier 2 and Tier 3 cities and left the field to local developers. They recollected their own regional competence and realigned their companies accordingly. Nevertheless there is a huge demand for these Tier 2 and Tier 3 cities, especially in terms of affordable housing for industrial workforces.

• According to DTZ report "green building: benefits and future outlooks" the offer of such green buildings nearly doubled in comparison to 2007. In September 2009 there were ca. 6.8 m sqft supplied. Major contributor is the commercial realty market. Residential real estates are yet to join. The mentioned study put the blame on the developers of residential units. Green building developments are among 5% to 8% more expensive than common buildings. On the one hand there is a higher rent, but on the other hand service costs will be reduced by 15% to 20%. The State Bank of India has started offering confessions in the form of interest rate reductions up to 0.25% on developments of green buildings. The Developer's lobby is yet to give a response. For them it is just a beginning so that they expect more incentives and discounts for green project advancements.

• The Indian government is currently gathering a final draft bill which aims at introducing a rating system for builders and developers. The final ratings would be updated on the regulator's website. Basics for the rating are the financial strength in terms of turnover, liquidity, profitability and scale of operations, intellectual expertise based on the qualification and experience of the management board, and past performances. The move is expected to help improve transparency and competition in Pan-India. The bill will enter into force as from winter this year.

• The government is also planning to amend the Foreign Direct Investments. Particularly the sectors explosives and chemicals will be taken out of the automatic route which is handled by the Reserve Bank of India. The next step is a more comprehensive security screening for sectors refineries, civil aviation, defense production, power and real estate. In so doing, the focus is primarily national security and interests.

• Furthermore the Indian government is planning to extend the rules for Foreign Venture Capital Funds. Until now it is possible to invest with tax benefits in 10 sectors, e. g. infrastructure, bio-technology, nano-technology, biofuel and IT-related activities. Already registered FVCF are free to invest in almost any business in the country. For buying into firms which are outside the 10 sectors, the fund will have to either approach the Foreign Investment Promotion Board for FDI´s where the board approval is required, or invest directly in areas where FDI is permitted under the automatic route. Fearing a real estate bubble, the Reserve Bank of India insists that FVCF´s will not invest in property firms.

• In comparison to other world economies India is expected to witness a robust recovery of economy’s growth. With an expected real GDP growth of 5.4% for the year 2009 Indian economy is the second strongest economy after China with a GDP of 7.5%. The world economy is likely to contract by 1.4% during 2009. The fiscal deficit in India leaped from 3.1% in 2007 to 6.1% on 2008. For 2009 it is expected to inch up to 6.4% during 2009.

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