INRnews - Indian Real Estate News

The industry is estimated to grow at a 33% CAGR to touch US$50bn by 2010. Strong economic growth, favourable demographic changes, fiscal benefits, lower interest rates and improving institutional framework have helped the industry grow rapidly over the last 2-3 years. The industry is estimated to have grown at 30% annually in 2005. Government has also shown keen interest in developing the sector by relaxing FDI norms, allowing market participants to access foreign capital.

The evaluation also reflects that, since 2004 most companies have reported astronomical growth in profitability on the back of rising property prices. Management interaction has induced the analyst to think that the growth is set to continue in the future as well. Companies have lined up projects, which are more than 2-3 times the size they have completed in the past 5 years. While the macro theme supports this exuberance, there are certain concerns, which cannot be overlooked. The following risks are highlighted in the demand led real estate growth story:

(1) Economic slowdown and drop in property prices
(2) Interest rate risk
(3) Roll back of income tax benefits
(4) SEZ framework not yet completely developed
(5) Drop in the wealth effect

Sachin Neema, Head of Research, India Infoline Ltd. said,” Indian real estate market is growing at a rapid pace on the back of improved real estate prices and sustained demand from end users as well as investors. High economic growth, favorable demographic and socio-economic factors have led to a sharp rise in demand for housing and commercial real estate. Unlike most markets, multiple themes are playing out at the same time in India. We estimate India to experience a demand supply gap of 17.9mn housing units by 2010. This apart, commercial real estate demand is expected to be around 350mn sq ft out of which IT/ITES and organized retailing sector should contribute around 300mn sq ft. Sensing this huge opportunity, the market has seen increased interest following the FDI relaxation and government’s SEZ policy. Cities are expected to form hubs of development, around which economic activity will prosper.”

Ashutosh Narkar, Research Analyst, India Infoline Ltd said, “Our analysis shows that Tier I and II cities are best placed to take advantage of the growth in the real estate market. We prefer companies in the growing NCR region and Tier I and II cities. We initiate coverage on the sector with a BUY rating on Ansal API, D.S Kulkarni Developers, Arihant Foundation and Housing, Prajay Engineer and Syndicate and Ansal Housing and Construction. Slowdown in economic activity, monetary tightening and sharp drop in property prices are key concerns to our estimates.”

Narkar further stated that, “We have narrowed down our preference on the choice of region and available investment opportunities. While we prefer Tier I cities for their scalability and growth opportunities offered, development is expected to move down into Tier II cities that offer these virtues at comparatively lower costs. We feel Tier III cities are most at risk as they offer low scalability options and high liquidity risk in the event of slowdown. Among the Tier III regions we prefer the NCR suburbs which are likely to benefit from conducive government policies attracting investments.”