PORTER’S DIAMOND ANALYSIS

REAL ESTATE SECTOR IN INDIA

Compiled by: Abhinav Srivastava Akash Sen Atish Mukherjee Samarth Upadhyaya

Factor’s Endowment- Average:

Basic Factors- Strong

o Cheap Labour Cost – According to International Labour Comparisons of U.S.

Bureau of Labour Statistics, Average hourly compensation cost of organised

labour in India is less than 5% of the cost in U.S. Thus labour costs are

significantly cheaper for the real estate sector in India.

o Construction material availability – According to IBEF report, Production of

cement in FY12 in the country was 247 MT. Moreover according to

Government data, the supply of Steel also exceeds demand in the country.

Thus there is no paucity of construction materials in the country and is

available for the sector.

Advanced Factors- Average

o Shortage of skilled professionals – A research by RICS (Royal Institution of

Chartered Surveyors) has highlighted that as of 2011, the supply of

professionals in built environment comprises nearly 50 million people, of

which only 2 million are professionally qualified.

o Urbanization of areas - As per the Census 2011, the urbanisation rate stood

at 31.2% for the year 2010-11, an increase from 27.8% in 2000-01.

o Fragmentation of market with few major national players in Real Estate – As

per the IBEF Sector Report, only few large, pan-India players such as DLF,

Jaypee Infratech Ltd., Godrej Properties Limited and Unitech exist in the real

estate market.

Source: Census of India, 2011.

Local Demand Condition

a) Real Estate (Residential) - Strong:

Demand for residential properties has surged due to increased urbanisation and

rising household income. As per the Census 2011, the urbanisation rate stood at

31.2% for the year 2010-11, an increase from 27.8% in 2000-01.

As per the IBEF Sector Report,

o By 2031 the total number of Indians living in urban areas will increase from

377 million to 600 million approximately.

o Demand to grow at a CAGR of 19 per cent between 2010 and 2014

o The housing shortage in urban and rural India will be around 21.7 and 19.7

million units respectively in 2014.

Source: Census of India, 2011.

.

o Total rural housing shortage is estimated at 43.7 million during the period

2012-2017.

o Total demand projection for top cities in India to cross 710000 units.

Allocation of USD 2.8 billion for rural housing for FY14 budget.

Rise in the number of nuclear families further fuels the demand for residential real

estate.

Easy availability of finance is also a factor contributing to increased demand for real

estate.

Source: Ministry of Housing and Urban Poverty Alleviation, RBI, CRISIL, Aranca Research

Source: Cushman & Wakefield, Aranca Research

b) Real Estate (Commercial) – Strong:

Growing economy is driving demand for

commercial and industrial space, especially

from IT/ITeS, BFSI and Telecom. The total

value of investments in the office segment in

H1, 2013 was at INR 7 billion. There is strong

growing trend towards investments in ready

office space. The growing stability of the

market is reflected by the continuous

growth of the core investors (both number

and value) with over Rs. 77.05 billion

invested in ready office space during the last

three years.

Of a total supply of 445 million sq ft of office space planned in 10 major cities,

around 167 million sq ft would come up during 2013 -15 with the demand being 66

million sq ft during the same period.

There is an increasing requirement of real estate from education and healthcare

sector. According to a report by Corporate Catalyst India (CCI), India is expected to

need an additional 920,000 beds, giving rise to an investment between USD 32

billion to USD 50 billion in the health care sector over the period of 2010-20.The

healthcare sector is estimated to grow at the rate of 15 per cent from 2011-16.

Booming consumerism is expected to push the organised retail sector that is already

growing at 25 per cent annually. It is estimated that organised retail would grow

from $40 Billion to $ 200 billion in the next 5 to 7 years.

Growth in domestic as well as international tourism is pushing the demand for more

real estate in the hospitality sector. According to a report by Corporate Catalyst India

(CCI), foreign tourist arrival in India is increasing at a CAGR of 10.5 per cent during

2012-15.

According to property consultant Cushman & Wakefield, Hospitality sector will see a

rise of over 65 per cent in total hotel inventory by 2017 and around 52,000 new

hotel rooms are expected to come up.

Related and Support Industry- Strong:

The Real Estate sector exudes a large influence over a number of ancillaries including

Financial Services, Steel, Cement, Glass, Paints, Furniture, etc. Real Estate sector has been

the major driving force behind the growth of many of these industries.

Financial Services – As per the IBEF Financial Services Sector Report

o The size of banking assets in India reached US$ 1.8 trillion in FY 13 and is

projected to touch US$ 28.5 trillion by FY 25.

o The financial services sector in India is dominated by commercial banks which

have more than 60 per cent share of the total assets.

o As per the Aranca Research, a constant growth can be witnessed in credit to

housing finances. The constant growth has consistently provided driving

impetus to the banking and financial institutions.

Source: Aranca Research

Source: Report by Corporate Catalyst India

o The demand for the housing credit in the low and medium income group

exceeds the supply by three to four times, thus, fuelling the banking sector to

a great extent.

Cement – As per the IBEF Cement Sector Report

o India is among the best cement markets in Asia.

o The production of cement has increased at a compound annual growth rate

(CAGR) of 9.7 per cent to reach 272 million tonnes (MT) during FY 06–13.

o As per the Aranca Research, 64% of cement demand was from the Housing

Sector, followed by Infrastructure (17%), Commercial & Institutional (13%),

and Industrial (6%).

Steel – As per the IBEF Steel Sector Report

o India is the fourth largest crude steel producer in the world and the largest

producer of sponge iron.

o The total market value of the Indian steel sector stood at US$ 57.8 billion in

2011 and is expected to touch US$ 95.3 billion by 2016.

o The construction sector accounts for around 60 per cent of the country's

total steel demand.

Source: Aranca Research

Firm Strategy, Structure and Rivalry- Weak:

As per the IBEF Sector Report

o Indian construction market is expected to more than double to USD 649.5

billion by 2020 from USD 360 billion in 2010.

o FDI in the sector is estimated to grow to USD 25 billion in 10 years.

o Indian construction market is expected to be the world’s third largest by

2020.

The residential real estate market is localised and there are several small players that

are mainly family run businesses and lack any professional structure. The usual

Investor Investee Investment (USD million)

BlackstoneManyata Embassy Business

Park160

APG and Group of investors Godrej Properties 140.8

Government of Singapore

Investment Corporation Godrej Properties 98.2

Morgan Stanley Real Estate

InvestmentSupertech 91.4

Baring Private Equity

Partners IndiaBengaluru based RMZ Corp 91.4

Morgan StanleySheth Developers Private

Limited84.8

Source: JSPL May 2013 presentation, Aranca Research

Source: Grant Thornton, Venture Intelligence, Aranca Research

strategy of these players is to build at an economical cost and undertake its Below-

the-line (BTL) marketing heavily.

The rivalry and competition between the firms compels them to keep costs under

limit and cut down on their offerings. As the bigger players cannot match the prices,

their presence is limited in the space.

DLF, Unitech, Jaypee Infratech Ltd. and Godrej Properties are the few top players in

terms of value.

As the number of projects is increasing with the growing economy, companies have

a positive book value keeping the competition and rivalry under limits.

Government:

Stimulation

o Decision to develop 100 smart cities.

The Government has a vision of developing ‘one hundred Smart Cities’, as

satellite towns of larger cities and to modernize the existing mid-size cities.

Rs. 7060 crore has been allotted by the government in the Budget 2014.

o Easing the FDI rules to facilitate investments by foreign players.

FDI policy requirements regarding built up area and minimum capital norms

has been reduced from 50,000 square meters to 20,000 square meters and

USD 10 million to USD 5 million respectively, with a three year post

completion lock-in. Projects with minimum 30% of its total project cost for

low-cost affordable housing to be exempt from built-up area and minimum

capital under FDI policy, however, the three year lock-in shall apply.

o Government plans to build houses under various schemes through National

Housing Bank (NHB). A sum of Rs 4,000 crores for the National Housing Bank

has been set aside by the government to provide cheaper credit facility under

the affordable housing scheme for the urban poor/EWS/LIG segment.

o Incentives for real estate investment trusts (REITS). Enabling the framework

for REIT/ InvITs, including clarity on taxation, would enable flow of

investment in real estate and Infrastructure sectors. There will be a major

boost to investor sentiment.

o The ministry of Housing and Urban Poverty Alleviation has plans of

introducing a single-window system for clearance of all real estate projects

across the country. The system can bring down the average approval time

from the current 196 days to 45-60 days.

Bureaucracy and Laws

o Investment

Investment Indian Contract Act, 1872

Transfer of Property Act, 1882

o Competition

Government through Competition Commission of India (CCI) is active

in scrutinising the trade practices followed by the companies.

Recently, it has asked 20 leading builders, including Tata Housing,

Unitech, Ansal Properties to respond to findings that they engaged in

unfair trade practices like one-sided contracts with inadequate

disclosures.

o Operations

Registration Act, 1908

Special Relief Act, 1963

Urban Land (Ceiling and Regulation) Act (ULCRA), 1976.

The Indian Evidence Act, 1872

Rent Control Acts

The Town & Country Planning Acts

Land Acquisition, Rehabilitation and Resettlement Act, 2013

o Market

Union Government will be introducing the Real Estate Development

Regulatory Bill in the winter session of the Parliament, in order to put

a check on the unscrupulous builders who try and escape

responsibility of providing promised facilities to the property buyers.