Demand of real estate and infrastructure

Infrastructure will be the key theme over the next decade, driving real economic growth. The strong economic and infrastructure growth will result in an impetus to a broad-based vibrant real estate development. The increasing demand of both real estate and infrastructure in the next few years is expected to be accompanied by significant push by regulators and policy makers. These developments are expected to create an economically stronger India by 2025. However, a sound risk management regimes needs to be adopted.

The most noteworthy aspect is the increasing realization of the infrastructure imperative at the government level. The private sector participation has been pushed considerably in road and telecom sectors, yielding benefits. Since the easing of regulatory constraints in 2004, the telecom network has become the third largest in the world along with a drastic reduction in tariff rates.

The urban infrastructure has also been put at the center-stage by the National Urban Renewal Mission of central government. There are projects worth more than Rs 1,000 billion to be undertaken by 63 major cities in the areas of water supply, sanitation, solid waste management roads and social infrastructure. These projects will be funded by national, state and local governments; and are expected to catalyze creation of vibrant urban agglomerates.

Currently infrastructure investments in India constitute less than 5% p.a. This compares with 9-11% p.a of GDP for East Asian economies. There is a huge infrastructure deficit in India, ranging from the core infrastructure areas of ports, roads, airports, power to the urban infrastructure requirements of water and sanitation.

In the road sector, the rapid freight and passenger traffic growth in the recent past has resulted in over loaded vehicles and high vehicle density. In the ports sector, there is an inadequate capacity, low draught, poor connectivity, high vessel handling charges and high turnaround time three to five days (this compares with four to six hours in Singapore and Hong Kong). The water sector suffers from old and poorly maintained T&D network, high physical losses of 25 to 50%, overstaffed utilities, water contamination low user charges and poor collection efficiency.

According to the Eleventh Plan of Planning Commission, there is a need to increase investments to 9% of GDP i.e. $515 billion by 2011-12 and to $1520 billion over next 10 years. Further, given the fiscal constants of central and state governments, private sector funds would play a key role in the infrastructure creation. Almost 30% of the funds are expected to be contributed by the private sector.

There is a structural shift taking place in real estate sector, with increasing corporatization and higher integration with the economy. This has been driven by an unprecedented increase in demand for real estate. The future growth in real estate will be facilitated by the policy push by national and state governments. Major policy measures expected in this direction are reform of Rent Control Laws balancing the interest of landlords and tenants, reduction of stamp duty to close to 5% from the high rates of 6% to 14%, revision of bye-laws to streamline the approval process for building construction, site development etc., simplification of legal and procedural framework for conversion of agricultural land for non-agricultural purposes and integrated township policies.

On the flip side, there has been an over leveraging of execution and financial strength by the real estate developers to benefit from the real estate up turn of the past three years; in view of slow down in demand, this could lead to a shake out. Consolidation will transfer this highly fragmented sector, and aid the emergence of operationally and financially strong players that have the resources and management capability to tide over the current crisis. By 2025, the real; estate sector is expected to be much more mature, with the emergence of national players – both domestic and foreign higher level of corporatization, de-centralized and professional management, stronger financial risk profile. There would be increased information availability and greater transaction transparency.

Most importantly the customers are expected to be much more demanding and the developers would be expected to provide customized innovative, efficient, market need based solutions. The regulatory and policy framework would be stronger with stringent regulations relating to transparency, accounting norms, there would be well integrated infrastructure and housing policies; there would be the real estate regulator at national and state level to enforce regulations. Superior risk management in infrastructure and real estate creation is the key to sound growth.

Both infrastructure and real estate sectors have their inherent risk. The infrastructure rejects face long gestation period high construction risks, absence of long term debt market, political risk including land acquisition and policy risks. The real estate projects face cyclicality of demand, delays in obtaining local clearances and approvals, apart from slowdown in user sectors. Hence superior risk management is the key to ensuring economically viable asset creation hic hub turn would translate into strong economic growth. The test of the real estate sector’s robustness will lie in its resilience to downturns in demand and prices.