Building, Construction and RealEstateServices t Submitted By : SURABHI AGARWAL ERAM KHAN FATIMA ABBAS AARTI CHAUDHARY ABHISHEK GANGWAR
ACKNOWLEDGEMENT Before we get into thick of things, We would like to add a few words of appreciation forthe people who have been a part of this project right from its inception. The writing of this projecthas been one of the significant academic challenges We have faced and without the support,patience, and guidance of the people involved, this task would not have been completed. It is tothem We owe Our deepest gratitude. It gives us Immense pleasure in presenting this project report on “Real Estate Industry”.It has been our privilege to have a team of project guide who have assisted me from thecommencement of this project. The success of this project is a result of sheer hard work, anddetermination put in by us with the help of my project guide. I hereby take this opportunity to adda special note of thanks for Prof. Yash Shridhar, who undertook to act as our mentor despite hismany other professional commitments. His wisdom, knowledge, and commitment to the higheststandards inspired and motivated us. Without his insight, support, and energy, this project wouldnthave kick-started and neither would have reached fruitfulness.We convey our heart full thanks to the member faculties of IIPM, with their help andcorporation.We are very thankful to our Project guide Prof. Swati Srivastava(IIPM , Lko) for her fullsupport in completing this project work.Last but not least, we would like to thank our families and Friends for their full cooperation &continuous support during the course of this assignment. The project is dedicated to all those people, who helped us while doing this project.
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Building, Construction Industry and Real Estate Services Table of Contents 1. Executive Summery 1.1. Industry size and Growth of Construction Industry ................................................................ 18 1.2. Industry Segmentation ............................................................................................................ 19 1.3. Real Estate Sector ................................................................................................................... 20 1.4. Infrastructure ........................................................................................................................... 22 1.5. Key Risk Factors for Construction Industry ......................................................................... 26 1.6. Market Structure of Construction Industry ........................................................................... 30 1.7. Major Players ........................................................................................................................ 31 1. Analysis 1.1 PEST Analysis…………………………………………………………………….. 35 1.2 Swot Analysis…………………………………………………………………… 36 1.3 Porter’s Five Forces Model…………………………………………………………37 1.4 Ratio Analysis……………………………………………………………………….42 1.5 CAGR………………………………………………………………………………44 2. JnNurm 2.1 Power…………………….........................4 8 2.2 Ports……………………………………..49 2.3 Airports………………………………….49 2.4 Roads……………………………………50 3. Research 3.1 Abstract………………………………53 3.2 Introduction…………………………..…53 3.3 Objective of the Study………………….54 3.4 Hypotheses Of the Study……………….54 3.5 Research Methodology…………………54 3.6 Discussion……………………………....54 3.7 Conclusion and Suggestions…………....58List of Figures Figure 1: Industry size and growth of Construction GDP at constant prices (Rs. billion)...................... 4 Figure 2: Indian Construction Industry Landscape ................................................................................. 5 Figure 3: Share of Real Estate and Construction by GDP contribution.................................................. 5 Figure 4: Real Estate Segments .............................................................................................................. 6 Figure 5: Housing Shortage by State over the Eleventh Five Year Plan (million houses (% of share of various states).......................................................................................................................................... 7
Building, Construction Industry and Real Estate ServicesFigure 6: Size of Commercial/Retail Construction .............................................................................8Figure 7: Commercial Office Space Absorption by location, 2007 ...................................................9 Figure 8: Distribution of Outlay in Infrastructure Segments in Tenth and Eleventh Five Year Plans.. 10 Figure 9: Breakup of employment in Building, Construction and Real Estate sector in India ........ 18Figure 11: Value chain within the Real Estate segment ....................................................................21Figure 12: Value chain within the Infrastructure segment .................................................................22Figure 13: Activities in the Project Execution stage ..........................................................................22Figure 16: Investment planned under JnNURM totalling Rs. 3,35,000 crore ...................................38Figure 17: Investments under various heads of JnNURM (Rs. crore) ...............................................38Figure 18: State-wise investments under JnNURM.......................................................................... 39Figure 19: Investments in Power Generation, Transmission and Distribution up to 2021-22 (Rs.crore)......................................................................................................................................................... 39Figure 20: State-wise investments in Transmission and Distribution.............................................. 40Figure 21: Planned Investments in Roads in the Eleventh Five Year Plan (Rs. crore)................... 42Figure 22: Projected Real GDP of Construction sector (Rs. billion) ............................................... 42List of TablesTable 1: Urban Population in India.................................................................................................. 13Table 2: Total Power Generation Capacity in India......................................................................... 14Table 9: Airports commissioned / granted approval / under consideration ......................................41Table 10: Share of economic activity estimated in the Infrastructure segment .............................
Building, Construction Industry and Real Estate Services The project” Real Estate industry” is based on the current industry t r e n d s o f R e a l e s t a t e s e c t o r . The main objectives of the project are: • Understanding the functioning of Real Estate Industry • Analysing the industry performance on Qualitative and Quantitative Basis. • Forecasting the Future Investment in the Sector. • JnNurm Scheme in coming years. • To study the fundamental factors affecting the real estate value. • To examine the factors of real estate boom in 2008. • To present the future constraints of real estate investment in India.For this proj ect the fina nci al perfor ma nc e of the ma jor pla ye r s of the industr ywas studie d a nd inter pret ation wer e dr awn. We lea rnt Cumula ti ve Aver ageGrowt h Rate and Compound Ave rage Growt h rat e to conduct Quanti tati vea nal ys is of the Industr y.The Report Is Divided Into Various Sections:Industry OverviewT hi s p a r t d e s c r i b e s t h e I n d u s t r y p r o f i l e . T h i s p a r t r e c o g ni z e s t h eC h a r a c t e r i s t i c s of R e a l E s t a t e ,Driving Forces, it also gives little insights into Real EstateInvestment Banking . This section also describes the Major Players Of the Sector.AnalysisQuantitative and Qualitative analysis are conducted in this sector and Recommendation are theoutput .JnNurmThis Part Discusses JnNurm Schemes and various investment to be made under this Schemes. It’sEffect on Real Estate industry.ResearchThis Part Contains the Study Conducted in year 2008. The factors in the present paper are theMacro Economic factors for which the secondary data is more suitable and reliable. The
collected in the aforesaid manner have been tabulated in condensed form toBuilding, Construction Industry and Real Estate Services draw the meaningful results. To analyze the data tables, percentage and graphs were used.FindingsA Detailed Analysis Of the industry Shows that Growth Rate of The industry has declined since lastfive years , showing the effect of Global Recessions in India. Although India’s Real estate’ssituation is very much healthy against over countries of the World. But Developers did face theDrop in demand of the properties which has decreased the prices of Properties indirectly. Ascompanies are trying to achieve large number but lower margin sales these day.At the end submitted to “ IIPM – lko”.
Building, Construction Industry and Real Estate ServicesCurrent Scenario of the Real Estate Market in IndiaCommercial real estate sector is in boom in India. In the last fifteen years, postliberalization of the economy, Indian real estate business has taken an upturn and isexpected to grow from the current USD 14 billion to a USD 102 billion in the next 10years. This growth can be attributed to favorable demographics, increasing purchasingpower, existence of customer friendly banks & housing finance companies,professionalism in real estate and favorable reforms initiated by the government to attractglobal investorsCharacteristics of the Real Estate Market in India • Realization of large commercial projects Growing Market Demand • IPOs by developers • Gradual organization of the markets in the Tier I cities • Emergence of transparency and liquidity Greater availability of • Entry of international real estate information consultancies • Governing legal framework relaxed • Competitive pricing Cause-Effect scenario leading to emergence of organized real estate market in IndiaThe property market in India has traditionally been unorganized and fragmented.However, the recent past has seen a consolidation of positions in the market asdevelopers are stretching their capacities to the maximum in order to meet the growingmarket demand, which in turn has encouraged large projects with sourced financing. TheIPOs by large real estate developers like Sobha, Raheja and DLF have led to organizationof the market in the Tier I cities, but the Tier II and Tier III cities still demonstrate thetraits of an unorganized market. Whilst the Indian real estate market still lackstransparency and liquidity compared to more mature real estate markets, the increasingrequirements of multi national occupiers, as well as the influx of international propertyconsultancies has led to the introduction of greater availability of market information,both in published and private form pushing the sector to an organized market form.
Driving ForcesStated below are the reasons that have led to the real estate boom in the country • Booming economy; accelerated GDP to 8% p.a. • India’s emergence as an attractive offshoring destination and availability of pool of highly skilled technicians and engineers ; Development of large
Building, Construction Industry and Real Estate Services captive units of major players include GE, Prudential, HSBC, Bank of America, Standard Chartered and American Express • Rise in disposable income and growing middle class, increasing the demand for quality residential real estate and real estate as an investment option. • Entry of professional players equipped with expertise in real estate development; • Relaxation of legal rulings and processes by the governing bodies encouraging investments in real estate • Improvement in infrastructure facilities Categorization The demand for new office space in India has grown from an estimated 3.9 million sq. ft in 1998 to over 16 million sq. ft in 2004-05. 70% of the demand for office space in India is driven by over 7,000 Indian IT and ITES firms and 15% by financial service providers and the pharmaceutical sector. In 2005 alone, IT/ITES sector absorbed a total of approx 30 million sq. ft and is estimated to generate a demand of 150 million sq. ft. of space across major cities by 2010. This data clearly demonstrates the growth of the real estate sector in the country. With reference to the availability of infrastructure facilities, following cities are currently attracting MNCs/corporate/real estate developers: Tier I cities, Mumbai (Commercial hub), Delhi (Political hub) and Bangalore (Technological hub): • Preferred option for many new market entrants • Command the highest international profiles and significant proportion of FDI • Offer qualified labor pool and the best infrastructure facilities • Exhibit development of sub-urban commercial real estate • Yield of 9.5 – 10% Tier II cities, notably Hyderabad, Chennai, Chandigarh, Kochi, Mangalore, Mysore, Thiruvananthapuram, Goa, Bhubaneshwar, Ahmedabad and Pune • Yield of 10.5-11.5% • Offer competitive business environments, human resources availability, telecommunications connectivity, quality of urban infrastructure, • Attract high value IT, ITES and biotech corporate houses Tier III cities, like Cuttack and Jaipur • Low liquidity and still highly unorganized. Special Economic Zones: • 28 operational SEZs in the country, including those converted from Export Processing Zones (EPZ) to SEZ
Building, Construction Industry and Real Estate Services • Development of SEZs in various segments such as multi-product, Information Technology, Bio-technology, Gems and Jewellery, Textiles and technology intensive industries • Attract both developers and corporate houses (refer table for a list of corporate that have shown interest in development of SEZs) Corporate Location Reliance Industries Gurgaon, Mumbai/Navi Mumbai Adani Group Mundra TCG Refineries Haldia Suzlon Coimbatore, Udipi, Vadodara Hindalco Sambalpur Genpact Bhubaneshwar, Jaipur, Bhopal Vedanta Orissa Corporate interested in development of SEZs in India and the location of interest Apart for the corporate clientele, the SEZs also attract a number of real estate developers, including DLF, Ansals, Omaxe, Parsvnath, Shipra Estate to name a few. As per utilization, the real estate space can be classified as follows: Real Estate Utilization Residential Commercial Office Hospitality Retail Malls Multiplexes Real estate utilization Listed below are the salient features of each category: Commercial Real Estate
Building, Construction Industry and Real Estate Services Office Space • Backed by strong infrastructure • Promoted by increasing demand from IT industry • Shift of focus from the traditional CBDs towards secondary centers owing sharply higher land prices in the city centers. Retail Space • Growth of 25- 30% expected in the organized retail sector (malls and multiplexes) leading to an increased demand in real estate • Affected by government policies for foreign retailers • Pronounced in the Tier I, Tier II and Tier III cities. Hospitality Space Criteria Statistics Annual growth rate of the industry 8% Number of foreign tourists in 2005 4000000 Total number of five star rooms (2005) 96000 Total number of five star rooms needed by 150000 2010 Growing demand of real estate in the hospitality industry • Increasing demand of lodging in commercial cities such as Bangalore, Mumbai, Delhi etc. from business travelers. • Established brands in this sector include Asian Hotels, Indian Hotels, ITC, Le Meridien etc are in expansion mode with many new players such as Accor Group, Marriot, Choice, IHG Group Residential Real Estate • Development triggered by: o Low per capita housing stock o Rising disposable income o Easy availability of finance • Currently growing at 30-35% per annum • Driven by retail investors who view real estate as an attractive investment option as compared to mutual funds and stocks • Geographically widespread with townships being built in both the metros and the tier II and III cities Real Estate Investment Banking Real Estate Investment Banking is an approach to real estate financing – providing the client a host of services including the structuring of real estate projects, legal advice, operative management of real estate projects and support in marketing properties. The banking focus in Real Estate Investment Banking is on structured financing products and
Building, Construction Industry and Real Estate Services structuring of entire portfolios. Extending on similar lines is the importance of syndication that forms the base line of larger-sized transactions. Real estate investment banking focuses on the following target market as prospective client base: Real Estate Consultants The increase in transparency and liquidity in the real estate market in India is attracting international real estate consultants to India. These consultants offer end to end solutions for their clients’ real estate needs. These services include strategic consulting to developers, investors, advisors and lenders seeking assistance with existing assets, potential acquisitions, new development projects and properties slated for disposition, feasibility studies, concept testing, business planning exercises, investment advice, market research and analysis, demand forecasting, financial modeling and project structuring exercises, portfolio optimization and re-engineering strategies, expansion and occupancy, location and entry, brokerage services, legal documentation review, valuations etc. Real estate consultants also ensure that the financing needs of the client are well taken care of by liaising with banking/non banking institutions and providing them with investment and structured finance solutions including securitization and sale & leasebacks, structured finance facilitating equity/debt into development projects on behalf of private and government sector clients, structuring development financing, public - private - partnerships, joint ventures, portfolio transactions and privatization exercises. The recent players in the Indian market are Jones Lang Lasalle, Colliers, CBRichard Ellis, Frank Knight and Trammell Crow Meghraj. Developers and Construction Companies With the opening up of the real estate sector in the country, the construction houses are scaling up the commercial and residential constructions. An increasing number of developers are offering IPOs for fund raising. AIM too is a sought after solution to meet the fund requirements for these developers. Group Route/Market Parsvanath IPO Sobha IPO Pyramid Saimira IPO DLF Universal IPO K Raheja Corp AIM Unitech AIM Hiranandani Construction AIM Fund raising options by developers Domestic Corporate Houses
Building, Construction Industry and Real Estate Services As the land prices in the Tier I cities have always moved upward, land was regarded as a safe investment which, regardless of how it was used, would produce capital gains far above the inflation rate. It was thus common for companies in the manufacturing and service industries to acquire real estate even though they themselves were completely unrelated to property rental or real estate investment, seeking collateral value and tax benefits from depreciated assets, and expecting unrealized gains to absorb business risk. Acquisition of real estate as an asset was further encouraged as part of a diversification strategy in the investment portfolio of these corporate houses.. As these real estate possessions are classified as fixed assets held for the company’s own business purposes, it becomes feasible recent moves to increase real estate liquidity often involve the conversion of corporate real estate into commercial use. The corporate houses in India are also demonstrating a shift from ownership to leasing. With the advent of MNCs into the country, a growing number of companies no longer see real estate ownership as an absolute necessity. From the perspective of companies who want to sell off assets, securitization schemes provide a greater diversity of alternatives to liquidate real estate. This has been greatly encouraged by corporate restructuring and a return to focusing on core competencies. Thus, there seems an opportunity to tap the corporate houses who have a large corpus of real estate and are willing to trade this asset for want liquidity. FDIs/FIIs Post liberalization, the investment opportunities in real estate for the FDIs and FIIs have greatly opened up. Foreign investors can now purchase commercial development projects (under construction) over 50,000 sq m (540,000 sq ft), or plotted residential developments with a minimum size of 10 hectares. Foreign investors may purchase an equity stake in an unlisted real estate company and thereby partner in its growth plans across asset classes and cities. Listed real estate companies also offer good liquid investment opportunities routed into designated special purpose vehicles that hold the asset(s) being developed, thereby reducing risk. These investors look for innovative financial products to suit their investing needs. Financial Institutions – Real Estate Mutual Funds Major financial institutions such as ICICI, HDFC, IL&FS and Kotak Mahindra have all launched real estate funds, either as joint ventures or sole investors. Most institutional funds operate on a pan-Indian basis, and are increasingly looking at opportunities in Tier III cities, in order to gain "first mover advantage". Private Equity/Venture Capital Funds As per the Securities and Exchange Board of India (SEBI), Foreign Venture Capital Investors (FVCIs) may invest in real estate assets, within the framework of SEBI. This has paved the way for capital infusion into the market and a significant weight of foreign capital is now chasing Indian real estate. Indirect real estate investments are made into a pooled investment fund; such funds are usually created in partnership with domestic developers or financial institutions. Such VC firms, partnered with developers form a potential client base, keen to invest in the real estate sector.
Building, Construction Industry and Real Estate ServicesReal Estate and Financing Trends in IndiaSecuritization and CMBSFrom the perspective of companies who want to sell off assets, securitization schemesprovide a greater diversity of alternatives to liquidate real estate. Securitization isprimarily used by the corporate houses to convert the corporate real estate to commercialreal estate.Realty Funds/ Realty Mutual Funds in IndiaInitiated by SEBI, the REMFs true potential would be tapped only after the setting up ofREITs, as they infuse confidence among investors by serving as custodians of title deeds.(REITs pool various real estate assets, including warehouses, buildings, industrial estatesand parks, malls, commercial and residential premises and get listed on the stockexchange to enable investors to buy and sell. They afford an opportunity to diversify theportfolio within that limited sense as well. However, SEBI has not allowed the creation ofREITs in India as yet, though REITs are well established in the more mature real estatemarkets. ) Currently the REMFs in the Indian market are targeted at the HNIS andcorporate investors.Risks involved in the Real Estate Investment MarketLiquidity riskThe real estate investment market is still in its infant stage. The time required for liquidityof real estate property can vary depending on the quality and location of the property.Regulatory risksIn terms of property ownership, permission from the Reserve Bank of India is requiredfor foreign investors. For capital repatriation, investors need to apply for approval fromthe RBI, and foreign direct investment is limited to a limited set of opportunities (e.g.townships). The REMFs work within the SEBI framework. Being a developing andgrowing sector, the rules, regulations and legalities demonstrate frequent changes,making it seem as a cumbersome investment option to the investors.Property market transparency riskThe Indian property market has low transparency when compared to the more mature anddeveloped real estate markets. Although market transparency has improved, reliable andconsistent information on the Indian property market is still not easily available. Thereare also more professional due diligence and valuation institutions needed. This holdstrue even for the Tier I cities.Macroeconomic risksInterest rates, inflation and exchange rate risks are amongst the important macroeconomicindicators and have shown decreased volatility. The provision of facilities, is in manyregions, still inadequate (education, transport infrastructure). These risk factors are notlikely to disappear in the near future, impeding the development of the real estate sector.Ownership and Land Title Issues
Building, Construction Industry and Real Estate Services Lack of information and low transparency in the real estate segment in India, coupled with the age old property related issues discourages the investment of the large players in the semi urban and rural areas thus slacking an overall growth of the real estate sector. Conclusion The Indian real estate sector promises to be a lucrative destination for foreign investors into the country. The Indian realty sector, if channelized properly, could catapult the growth of several other sectors in India through its backward and forward linkages. However, there are potential constraints for domestic as well as foreign investments in India. Absence of a single regulator to monitor business practices prevailing in Indian real estate market is perceived to be a risk factor by investors. The SEZ guidelines which are issued by the Commerce Ministry are constantly modified, creating uncertainty. Since the liberalization of FDI norms, significant foreign investments have flown into real estate; but availability of suitable exit options for such investments is still constrained.Maturity of the real estate markets will lead to infusion of foreign investment andadoption of international best practices by real estate players. Developers will get moreorganized, and become more transparent to avail opportunities emerging in the market. Withthe Indian securities market regulator SEBI allowing real estate mutual funds (REMFs) inIndia, equity investors will have an exit option available to them. All these factors willcontribute in making the Indian real estate market more organized and structured, thusproviding better investment opportunities.
Environment Scanning and Competitiveness of Construction Industry 1.1. Industry size and Growth of Construction Industry 1The size of the Construction industry is around Rs. 2.1 trillion in 2008. The Construction sector inIndia is the second largest economic activity after agriculture and provides employment to about 33million people. Indias Construction industry has grown at a Compounded Annual Growth Rate(CAGR) of about 11.1% over the last eight years on the back of massive infrastructure investment andrapid rise in housing demand. Foreign Direct Investment (FDI) inflow into the sector during 2007-08is estimated to be around Rs. 240 billion. Spending on infrastructure sectors such as ports, powerplants and roads is projected at more than Rs. 2.5 trillion annually for the next six years, and will 2require 92 million man years of labour .Construction investment accounts for around 52.4% of the Gross Fixed Capital Formation in India.Investments in Construction have a positive domino effect on supplier industries, thereby contributingimmensely to economic development. The Construction sector has strong linkages with variousindustries such as cement, steel, chemicals, paints, tiles, fixtures and fittings. While in the short term itserves as a demand booster, in the long term it contributes towards boosting the infrastructurecapacity. Figure 1: Industry size and growth of Construction GDP at constant prices (Rs. billion) 2,500 2,263 2,055 2,000 1,839 11.1%1,58 1,500 2 1,217 1,084 1,127 1,362 1,000 500 - 2001 2002 2003 2004 2005 2006 2007 2008Source: Economic Survey 2008-09 and IMaCS analysis2 Construction Industry Development Council
Building, Construction Industry and Real Estate Services 1.2. Industry SegmentationConstruction sector can be broadly classified into 2 sub-segments:1) Real estate (Residential, Commercial/Corporate, Industrial and Special Economic Zones (SEZs))2) Infrastructure (Transportation, Urban development, Utilities) Figure 2: Indian Construction Industry Landscape Construction Industry Real Estate Infrastructure Residential Utilities Urban Infrastructure Transportation Commercial Power Railways Special Irrigation Civil Aviation Economic Zones Roadways PortsSource: IMaCS analysisThe Real Estate segment contributes around 24% to the Construction GDP of India whileInfrastructure segment contributes around 76%. Figure 3: Share of Real Estate and Construction by GDP contribution Rs 504 Billion 24% Rs 1,596 Billion 76% Real Estate InfrastructureSource: Economic Survey 2007-08, IMaCS analysis
Building, Construction Industry and Real Estate Services 1.3. Real Estate SectorIn terms of GDP contribution, Real Estate sector is estimated at around Rs. 504 billion in 2007-08.The market size of the Indian real estate sector is estimated to be around Rs. 2,643 billion in 2007-08.The sector has been growing at a CAGR of 12%. It is constituted of the Residential, Commercial andreal estate activities of Special Economic Zones. Figure 4: Real Estate Segments Commercial / Retail SEZ 9% 9% Residential 82% Source: I-Sec Research, Ministry of Commerce and Industry, IMaCS analysis 1.3.1. ResidentialAt around Rs. 2,171 billion, the housing sector is estimated to grow at 12% in the long term. Demandfor housing is estimated to be around 4.8 million houses per year over the Eleventh Five Year Planperiod. In addition to the need for new housing tenements, the demand is also likely to be fuelled bythe housing shortages already prevalent in several states. The shortage of housing across severalstates, as illustrated in the graph below, amounts to about 25 million houses in the period of theEleventh Five Year Plan.
Building, Construction Industry and Real Estate ServicesFigure 5: Housing Shortage by State over the Eleventh Five Year Plan (million houses (% of share of various states) Andhara Pradesh Gujarat 1.95 1.66 8% 7% Other States Karnataka 5.11 1.63 Delhi 21% 7% 1.13 Madhya 4% Pradesh West Bengal Maharastra 1.29 2.04 3.72 5% 8% 15% Uttar Pradesh Tamil Nadu Rajasthan 2.38 2.82 1 10% 11% 4% Source: Planning Commission Working Group on Urban Housing, 2007 1.3.2. Demand drivers for Residential SectorFavourable demographics - The demographics work strongly in favour of the Indian Constructionindustry. India is the second highest populated country in the world after China. Indias estimatedpopulation as of March 2008 is 1.14 billion, while the average age of Indians is 26 years. Thedemographic profile indicates that Indias working population forms around 61% of the totalpopulation. India is and will remain one of the youngest countries in the world for some time. Thestrong economic growth led to sharp income generation, which led to rise in middle class segment.India currently has around 260 million persons in the middle class segment. This segments risingpurchasing power and propensity to consume is expected to drive and support a robust growth rate ofthe economy in the coming years. The middle class along with robust macro-economic scenario andchanging demographic profiles has a major role to play in the growth and emergence of theConstruction industry in India.Urbanisation and Migration - The decadal growth rate of urban population (20% between 1991-2001) in India is higher than the rural population (18% during the same period). Average annual rateof change (AARC) of the total population in India during 2000-2005 is estimated at 1.41% with2.81% for urban and 0.82% for rural sectors. AARC for urban areas by 2025 will increase to 2.25%whereas the AARC for rural population will decline to -0.4% showing a clear shift of population from
Building, Construction Industry and Real Estate Services 3 rural to urban areas . The average household size has been estimated by the National Sample Survey Organisation as being around 4.47 in urban areas and only 67% of the houses are pucca units. Though there is a slump in real estate activity in the last one year, investment over the long term will be primarily led by housing, which is expected to account for nearly 90% of the total real estate sector. 1.3.3. Commercial/Retail Construction The rapid growth of the Indian economy has had a significant impact on the demand for commercial property to meet the needs of business, by way of offices, warehouses, hotels and retail shopping centres. Growth in commercial office space requirement is led by the burgeoning outsourcing and information technology (IT) industry and organised retail. For example, IT and ITES alone is estimated to require 150 million square feet across urban India by 2010. Similarly, the organised retail 4 industry is likely to require an additional 220 million square feet by 2010 . Figure 6: Size of Commercial/Retail Construction Retail Office Rs 113 billion Rs 126 billion 47% 53% Source: I-Sec Research, Ministry of Commerce and Industry, IMaCS Analysis 3 th Planning Commission – Working group on Urban Housing for the 11 Five Year Plan 4 Source: India Brand Equity Foundation (IBEF)
Building, Construction Industry and Real Estate Services Figure 7: Commercial Office Space Absorption by location, 2007 Bangalore, 20 Others, 8% Total : 45 Million Square % Feet Pune, 8% Mumbai, 9% NCR, 19% Chennai, 12 % Hyderabad, 1 2% Kolkata, 12% Source: IBEF 1.3.4. Demand drivers for Commercial/Retail SectorThe following are some of the demand drivers in the Commercial/Retail Sector: ƒ Sharp growth in organised retailing – Organised retail, which is expected to grow at over 25% in the next few years, is likely to drive demand in the commercial real estate sector. Growth in IT/ITES sector at 30% annually - The investments in commercial Construction are expected to grow faster than investments in housing mainly due to the spurt in office space construction driven by IT/ITES industry. 1.3.5. Special Economic ZonesOver the next five years, growth in investments in Indian Industry will be driven by strong capacityadditions, led by strong growth in demand and high existing operating rates. Special Economic Zones(SEZs) will be at the forefront of this growth. About 315 SEZs which have been notified as of now, ofwhich about 202 belong to the IT/ITES Sector. 1.4. InfrastructureWith the governments focus on infrastructure development along with the active participation of theprivate sector, this segment is growing rapidly. The Power, Irrigation, Transportation includingRoadways, Railways, Airports and Ports, Urban Development and Communications sectors have thwitnessed investments of Rs. 6.9 trillion over the Tenth Five Year Plan (10 FYP) and will witness tharound Rs. 14.8 trillion in the Eleventh Five Year Plan (11 FYP).
Building, Construction Industry and Real Estate Services Figure 8: Distribution of Outlay in Infrastructure Segments in Tenth and Eleventh Five Year Plans 1,600,000 Rs 953 billion 1,400,000 1,200,000 Rs 5.7 trillion Communications 1,000,000 Transportation 800,000 Urban Development Rs 1.2 trillion Rs 989 billion Irrigation 600,000 Rs 2.1 trillion Power Rs 2.2 trillion 400,000 Rs 382 billion Rs 1.03 trillion 200,000 Rs 4.8 trillion Rs 2.3 trillion - 10th FYP 11th FYP Source: Economic Survey 2007-08 Indias infrastructure is set to improve rapidly with an estimated CAGR of 15%. Public spending would continue to dominate this sector. The Government of India projects that for the economy to 5 grow at 9% per annum over the Eleventh Plan period the Gross Capital Formation in the infrastructure should increase from 5% of GDP at the start of the Tenth Plan to around 9% at the end of the Eleventh Plan. The central government would contribute 37%, the state governments 32% and the private sector would contribute 31% of the total investments in infrastructure for the next five years. 1.4.1. Roads Roads occupy an eminent position in India’s transportation as they carry nearly 65% of freight and 85% of passenger traffic in the country. The Government of India in the Tenth Plan provided for an outlay of Rs.595 billion for development of roads. The largest highway project ever undertaken in the country is being implemented by the National Highways Authority of India (NHAI). Phase I and II of the National Highways Development Project (NHDP) envisaged 4/6 laning of about 14,279 5 Measure of the net new investment by enterprises, government and households in the domestic economy in fixed capital assets, during an accounting period
Building, Construction Industry and Real Estate Serviceskilometres of National Highways at a total estimated cost of Rs. 650 billion (at 2004 prices). Thesetwo phases consist of the Golden Quadrilateral, the North-South & East-West Corridors, portconnectivity and other projects. The upgradation of 12,109 km of existing national highways has beenapproved by the Government under NHDP Phase-III at an estimated cost of Rs. 806 billion.The Government has also approved six-laning of 6,500 km of NHs comprising 5,700 km of theGolden Quadrilateral and balance 800 km of other sections of NHs under NHDP Phase-V at a cost ofRs. 412 billion. The Government has approved construction of 1,000 km of expressways with fullaccess control on new alignments at a cost of Rs. 166 billion under NHDP Phase-VI and theconstruction of ring roads including improvement of NH Links in cities, grade separated intersections,flyovers, elevated highways, underpasses and service roads at a cost of Rs. 166 billion under NHDPPhase-VII.One of the physical targets for state infrastructure in the Eleventh Five Year Plan is the constructionof a core network would include expressways, four-laned roads, strengthened pavements, andpavements with good riding quality, bypasses, bridges, etc. for a length of about 71,500 km, with afinancial outlay of about Rs. 80,000 crore covering the states. This network could be based on the‘corridor concept’, such that a commercial vehicle can cover about 500 km on this network in one day(800 km or more on expressways) with adequate road safety.Rural roads would also be an important thrust area The Government of India has launched thePradhan Mantri Gram Sadak Yojana (PMGSY) which aims to provide good all-weather roadconnectivity to unconnected habitations. 1.4.2. AirportsIndia has 125 airports. Of these, 11 are designated as international airports. Airports Authority ofIndia (AAI) has taken up the development of infrastructure in the country through the PPP model.Joint Ventures formulated for the modernisation of Delhi and Mumbai airports, and development ofgreenfield airports at Bangalore and Hyderabad are cases in point. AAI has also drawn an action planto develop and modernise 35 non-metro airports. An investment of about Rs. 400 billion is projectedfor the development of airports during the Eleventh Five Year Plan. 1.4.3. Railways
Building, Construction Industry and Real Estate ServicesThe premier transport organisation of the country, the Indian Railways is the largest rail network inAsia and the world’s second largest. However there is a need to upgrade facilities to meet the growingrail transportation needs. The proposed investment in railways over the eleventh five year plan is Rs.2.8 trillion. PPP projects are estimated to account for 9% of total investment over the period to rampup infrastructure in 22 metropolitan city stations, increase terminal capacity by 43% and construct2,700 km of rail lines.The Tenth Five Year Plan document had envisaged construction of Dedicated Freight Corridors(DFCs) on selected trunk routes. This has since been given effect to with the announcement ofconstruction of DFCs separating freight traffic from passenger traffic on trunk routes. The proposalfor capacity augmentation through construction of DFCs along the highly saturated freight routes is apart of the new long-term strategy to provide premium services in freight and passenger travel.A Western Corridor of 1,469 km will connect Jawaharlal Nehru Port to Dadri and Tughlakabad in theNorth. An Eastern corridor of 1,232 km will connect Ludhiana to Sonnagar via Dadri and Khurja, thusfacilitating transfer from one corridor to another. The Eastern corridor will further get extended toKolkata region to connect the proposed deep-sea port. The estimated cost of construction of boththese corridors is expected to be around Rs. 372 billion and it is likely to take about five years forcompletion of these corridors and have a spill-over beyond the Eleventh Plan. 1.4.4. Ports and ShippingThere are 12 Major Ports and 185 Minor Ports along India’s 7,517 km long coastline. 100% FDIunder the automatic route is permitted for all port development projects. PPP is seen by theGovernment as the key to improve the existing facilities. This sector would see Rs. 1 trillioninvestments on shipbuilding and port infrastructure development within the next 5 years.The Eleventh Plan outlay for the shipping sector is Rs. 1,000 crore at 2006–07 prices. The sector is 6also expected to generate IEBR amounting to Rs. 12,285 crore at 2006–07 prices. In addition, thebudgetary support for ship-building and repairs is Rs. 150 crore (Rs. 170 crore at current price). TheIEBR for this sector is Rs. 550 crore at 2006–07 prices.The total projected outlay for the Eleventh Plan for the Department of Shipping (including Ports) isRs. 43,874 crore at 2006–07 price (Rs. 49623 crore at current price) which includes Rs. 4465 crore of6 Internal & Extra Budgetary Resources
Building, Construction Industry and Real Estate ServicesGross Budgetary Support at 2006–07 price (Rs. 5,050 crore at current price) and Rs. 39409 crore ofIEBR at 2006–07 price (Rs. 44573 crore at current price).The Indian shipbuilding industry is centred around 27 shipyards comprising 8 public sector (6 yardsunder Central Government and 2 under State Governments) and 19 private sector shipyards. Theshipyards between them have 20 dry docks and 40 slipways with an estimated capacity of 2,81,200Dead Weight Tonnage (DWT). A major share of this capacity is held by the 8 public sector yards andonly Cochin Shipyard Limited (1,10,000 DWT) and HSL (80,000 DWT) have the requiredinfrastructure to build large vessels.India’s share in the world shipbuilding market has increased from an insignificant 0.1% in thebeginning of Tenth Plan to 1.3% in 2006. On the export front, one public sector shipyard, that isCochin Shipyard Ltd (CSL), and three private sector shipyards, viz., ABG, Bharti, and Chowguleperformed remarkably well during the Tenth Five Year Plan period and were able to get export orders.The Indian Shipbuilders Association has estimated that the industry can grow at a rate of more than30% and this momentum can be maintained for the next 10 years to reach a level of 5 million DWTorder book for the Eleventh Five Year Plan as against 1.3 million DWT for the Tenth Five Year Plan. 1.4.5. Urban InfrastructureIndia’s total urban population is around 285 million, which is 30%of India’s population. There hasbeen significant growth of the urban population over the past decade and the trend is expected tocontinue. This warrants an urgent up-scaling and up-gradation of urban infrastructure. This sector isexpected to be the second-largest contributor to infrastructure investments after roads. Table 1: Urban Population in India Year 1981 1991 2001 Number of metro cities 12 23 35 (population-1 million +) Population (million) 42 70 108 Percentage of total 26 32 38 urban populationSource: Report of the Steering Committee on Urban Development, 11th FYP, Planning Commission of IndiaUrban Infrastructure covers basic civil services such as water supply, sewerage, solid wastemanagement and urban transportation. Water supply and sanitation projects alone offer scope for
Building, Construction Industry and Real Estate Servicesannual investment of Rs. 294 billion. Urban infrastructure investments will get a boost from theJawaharlal Nehru Urban Renewal Programme (JnNURM). The programme was started in 2005-06 toenable sustainable urban infrastructure development of 63 mission cities. Under this scheme, theprogramme receives Rs. 500 billion as central assistance and Rs. 500 billion from state governmentsand urban local bodies. Rs. 3.3 trillion was allotted under the City Development Plans scheme. Someother notable schemes for urban development include the Rs. 28 billion sub-mission on infrastructuredevelopment scheme and the Rs. 11.7 billion additional central scheme. Currently, 100% foreigndirect investment (FDI) under the automatic route is allowed in townships, housing, built-upinfrastructure and construction-development projects. Urban transport development is currentlysupported by the National Urban Transportation Policy (NUTP). 1.4.6. Utilities (Power and Irrigation)India has a power generation capacity of 122 GW. The sector has been growing at a CompoundAnnual Growth Rate of 4.6% over the last four years. India has the fifth largest electricity generationcapacity in the world. The Ministry of Power has formulated a blueprint to provide reliable, affordableand quality power to all users by 2012. This calls for an investment of Rs. 3.7 trillion in the next fiveyears.The gross electricity requirement by the end of the Eleventh Plan projected by the PlanningCommission Working Group on Power is 1,038 Billion Unit (BU) and peak demand estimation is1,51,000 MW. To fulfil the estimated electricity demand requirement, the Working Grouprecommended the capacity addition programme initially of 78,530 MW and updated at 78,577 MWduring the Eleventh Plan. Table 2: Total Power Generation Capacity in India Source Central State Private Total Hydro 9685 3605 3263 16553 Thermal 26800 24347 7497 58644 Nuclear 3380 0 0 3380 Total 39865 27952 10760 78577 thSource: Planning Commission, 11 Five YearPlanThe emphasis of the Central Government to improve irrigation facilities in the country throughprogrammes such as Bharat Nirman, Accelerated Irrigation Benefit Programme (AIBP), and state-level initiatives will be the main driver of investments in the irrigation sector. The plan outlay underthe Tenth Plan for irrigation sector was Rs. 922 billion. There is a renewed emphasis on this front
Building, Construction Industry and Real Estate Serviceswith states like Andhra Pradesh drawing ambitious plans. Increased focus on irrigation is evident fromthe fact that the Tenth Plan irrigation outlay was 50% more over the Ninth Plan. Investment inirrigation in the Eleventh Plan is projected to increase to Rs. 2,533 billion from Rs.1,115 billion spent 7in the Tenth Plan .Apart from the above, Government spending on infrastructure activities for defence and otherspecialised construction would also be a demand driver for the sector. 1.4.7. Demand drivers for Infrastructure Sector ƒ Economic growth would be around 7% CAGR over next decade ƒ Increased domestic investments and foreign direct investment in sectors such as communications ƒ Government policies with a thrust on developing infrastructure and increased government spending on transportation, urban development and utilities. 1.5. Key Risk Factors for Construction Industry ƒ Manpower Shortages - Although the construction industry employs 33 million people, second only to the agricultural sector, the incremental workforce requirement is around four million people per year over the next seven years to sustain the current growth rate. The construction industry is set to face a challenge in terms of sourcing manpower. Adding to this problem is the shortage of contractors. ƒ Procedural and Legal Vulnerability - Development projects entail clearances and permissions from various government departments. Delays are tedious and vary from state to state depending on local laws. Hence this adds to overall complexities of transaction, increasing the need for local expertise in each market. ƒ Low project risk, but high payment receivable risk - The project risk for a contractor is low, due to low financial commitments. Most construction projects are executed on a cash contract basis and are funded and managed by the owner/sponsor. The number of construction projects with equity participation by contractors is limited to a few projects.. Payment security concerns are high, and they depend on the credit profile of the client. Usually outstanding payments and retention money payable to the contractor are delayed, as these payments are made after the entire construction activity and project period is completed. This may affect the smaller players in the industry.7 Planning Commission, Government of India
Building, Construction Industry and Real Estate Services ƒ Infrastructure Bottlenecks - Infrastructure is a cause of concern in majority of cities across the country as recent infrastructure developments have been slow and has not kept in pace with the development. Inadequate power, absence of drinking water, electricity failure, traffic congestion and pollution are common features across the major cities in India. On the basis of current plans, electricity generating capacity will rise by 6% annually over the period 2007 to 2012, double the rate of the past five years and the second largest absolute increase in capacity in the world. However, this is still well below the likely growth rate of GDP. Power shortage could be an impediment to construction activities in the future. ƒ High level of fragmentation - The industry is highly fragmented, as the entry barriers are low due to less fixed capital requirements. It is estimated that in 2004, over 3 million construction entities (including housing contractors) existed, of which only around 28,000 were registered. However, there is more fragmentation in the housing segment than the industrial/ infrastructure segment, as the unorganised sector accounts for 75% of the same. Furthermore, the industrial/infrastructure sector requires far more technical expertise and it is difficult for smaller players in the unorganised sector to compete effectively. ƒ Title clearances for SEZs are invariably delayed - Title clearance in India is a complicated process in the absence of a central database of properties. This also adds to the costs and delays in a project. ƒ Delays in land acquisition: Delays in land acquisition is a major source of project delays and escalating project costs. This is applicable to large infrastructure projects such as SEZs, power plants, and others. ƒ Delays in Master Plan / Development Plan Review and Implementation - Experience of implementing the Master Plans has not been encouraging because of weak data base, financial constraints, lack of resource mobilization, over ambitious plan proposals, lack of integration between spatial planning proposals with economic development plans and inadequate legislative support and enforcement. ƒ Frequent and expensive reconstruction - The maintenance requirement of the high density corridor of NHs under construction and post implementation support is provided by NHAI. However, the non-NHDP NH sections, which are maintained by State PWDs, are poorly managed, primarily because the funds made available to them for maintenance are well short of the requirement as per norms. 1.6. Market Structure of Construction Industry
Building, Construction Industry and Real Estate ServicesThe Construction industry is highly fragmented, as the entry barriers are low due to less fixed capitalrequirements. Reportedly, in 2004, over 3 million construction entities (including housing contractors) 8existed, of which only around 28,000 were registered .However, there is more fragmentation in the housing segment than the industrial/infrastructuresegment, as the unorganised sector accounts for 75% of the same. Furthermore, theindustrial/infrastructure sector requires far more technical expertise. Around 96% of constructioncompanies are classified as small and medium enterprises. 1.7. Major PlayersPost independence, in the First Five Year Plan, construction of civil works was allotted nearly 50% ofthe total capital outlay. The first professional consultancy company, National Industrial DevelopmentCorporation (NIDC), was set up in the public sector in 1954. Subsequently, many architectural, designengineering and construction companies were set up in the public sector (Indian RailwaysConstruction Limited (IRCON), National Buildings Construction Corporation (NBCC), Rail IndiaTransportation and Engineering Services (RITES), Engineers India Limited (EIL), etc.) and privatesector (M N Dastur and Co., Hindustan Construction Company (HCC) etc.).The Indian Construction industry comprises of about 200 firms in the corporate sector. In addition tothese firms, there are about 1,20,000 class-A contractors registered with various governmentconstruction bodies. There are thousands of small contractors, which compete for small jobs or workas sub-contractors of prime or other contractors.The major players in the construction industry are: ƒ Companies such as L&T, Unitech, GMR Infrastructure, HCC, Gammon, Jaypee group, Jaiprakash associates, BL Kashyap etc. which undertake large infrastructure projects. ƒ Companies such as IVRCL, Nagarjuna, L&T, DLF, Omaxe etc. involved in the construction of flyovers, pipelines, apartments and housing/office spaces. ƒ Companies such as DLF, Purvankara, Raheja and others are engaged in the construction of residential and office space.8 Planning Commission – Eleventh Five Year Plan
Building, Construction Industry and Real Estate ServicesOrganized Real Estate Industry in India is only a couple of decades old .Real Estate Industry in Indiatook off with the global boom in the Realty Sector which percolated down to India as well.Lack of clearland titles and litigation has made this industry one of the most opaque and corrupt ones.Due to themassive price appreciation and huge valuations,Land Scams have become quite common with ChiefMinisters,Generals,Top Bureaucrats all involved in the murky environment of Real Estate in India.Themost recent scam related to bribing of top public banks officials in the LIC Housing Finance Scandal hasagain put question mark on the fundamentals of the industry.Valuing the industry and making a realestate investment remains one of the most difficult investing tasks in the Indian Stock Market.Even FundManagers are staying away from the Sector due to lack of trust in the Financial Statement given by theindustry.That said modern India presents a booming picture of tall buildings and huge office areas &shopping malls. A list of the chief players in Indian market is given below:• DLF: DLF’s chief business is to develop housing, marketable and retail properties. Currently it has undertaken the development of 70 million sq ft of housing projects which it intends to finish in the next three years. DLF has joined hands with Delhi Development Authority to develop townships in Amritsar, Pune, Gurgaon, Mumbai, Chennai and Goa. DLF has been the construction company behind different malls in the major cities in India. The company is also developing 50-75 hotels along with Hilton Hotels and infrastructure and SEZ in India in collaboration with Laing O’Rourke (UK).The current market cap is around Rs.51,832.22 crore.• Tata Projects: Tata Projects registered an annual turnover of Rs 2,300 crore on July 1, 2007. With more than 1,500 professionals the company has emerged as one of the chief player in EPC projects. Over the last four years, it has attained a CAGR of 50 per cent which quadrupled its annual turnover of 2006-07. Tata Projects functions in concentrated divisions like broadcast and distribution, steel, power production, oil, gas and hydrocarbons and industrial infrastructure.• Sobha Developers Ltd: With an annual turnover of Rs 1,189 crore, Sobha Developers Ltd was initiated by the now chairman PNC Menon in the year 1995. On June 30, 2007, the company has 3,706 skilled professionals working for it. At present it owns Rs 3,500-acre land in eight Indian cities namely Coimbatore, Bangalore, Mysore, Chennai, Thrissur, Kochi, Pune and Hosur. The company’s clientele include some of the top players in IT, hotel and construction sector such as Hewlett Packard, Mico, Infosys, Ramaraju Developers, Dell, Timken, etc.• Shapoorji Pallonji & Co: The Company has more than 3,500 professionals working for it and is largely driven by its loyalty to consumer satisfaction. Some of the major projects undertaken by Shapoorji Pallonji & Co are World Trade Centre, Mumbai; TELCO industrial complex, Pune; Bhabha Atomic Research Centre, Kalpakkam; HSBC Bank, Mumbai; Hotel Taj Intercontinental, Mumbai; Bank of India, Mumbai; Indira Gandhi International Airport, New Delhi, etc. the company has created magnum opus of construction and has been a consistent executer of challenging projects. • Unitech: Recently Ramesh Chandra, Unitech’s Chairman has declared the investment of $ 720 million by his company in the coming four years to develop 28 hotels along with Marriott
Building, Construction Industry and Real Estate Services • International. The market capitalisation of the company is Rs.16,867.40 crore.Its chief activities• include construction, expansion of real-estate, consultancy in associated sectors, hotels, electrical broadcast and information technology.• India Bulls Real Estate: One of India’s largest listed developers developing residential and commercial real estate. Being a focused regional player, more than 90% of IBREL’s portfolio by value is in the three major markets of Mumbai, NCR and Chennai. Established in 2000, the company has grown into one of the leading Indian business houses with its companies being listed on Indian and overseas financial markets having a combined net worth in excess of Rs. 18,000 crores. the current market cap being Rs.6,545.17 crore.• HDIL: Ranked as India’s fastest growing real estate company by Construction World-NICMAR in October 2007 & with a current market cap of Rs.8,567.76 crore, Housing Development & Infrastructure Limited has established itself as one of India’s premier real estate development companies, with significant operations in the Mumbai Metropolitan Region. HDIL is a public listed real estate company in India with shares traded on the BSE & NSE Stock Exchanges. With operations spanning every aspect of the real estate business, from residential apartment complexes to towers & townships, commercial premium office spaces and retail projects like world-class shopping malls. it is India’s largest slum rehabilitation company, & was given the Mumbai International Airport Slum Rehabilitation project in October 2007,one of the largest urban rehabilitation projects in India..• Emaarr-MGF: One of the world’s leading real estate developers company in India and Development of properties in the residential flats, Commercial Properties, premium apartments etc. The ‘Commonwealth Games Village builder’ is still trying to get listed on NSE. Currently not listed.
Building, Construction Industry and Real Estate Services Analysis • QuantitaivePest Analysis of Indian Real Estate SectorThe various factors which influenced the Real Estate segment were Political, Technological, Social andEconomical factors.POLITICAL FACTORS: • Government’s regulations and policies in favour of real estate sector. • Heaviest tax imposed on the construction industry. • FDI experience in Indian real estate market.ECONOMIC FACTORS: • Controlled Inflation levels. • Low Interest Rates. • Provides further LiquiditySOCIAL FACTORS: • Increase in consumption. • Urbanization. • Increase in per capita income (current prices). • Rise in Demand for Quality Housing Projects.TECHNOLOGICAL FACTORS: • Internet revolution • Media
Building, Construction Industry and Real Estate ServicesSWOT analysisStrength • employment and training opportunities in the field of construction • Private sector housing boom and commercial building demands • Construction of the multi building projects on the feasible locations in the country. • Good structured national network facilitates the boom of construction industry. • Low cost well- educated and skilled labour force is now widely available across the country. • Sufficient availability of raw material and natural resources in the country is supportive for the industry. • Real estate development is on high and it is attracting the focus of the industry towards construction.Weakness • Chances of Natural disadvantage are there. • Distance between construction projects reduces business efficiency. • Training itself has become a challenge. • Changing skills requirements and an ageing workforce may accentuate the skills gap. • Improve in long-term career prospects is highly required to encourage staff retention and new entrants. • External allocation of large contracts becomes difficult. • Lack of clearly define processes and procedures for construction and its management. • Huge amount of money need to be invested in this industry and inefficiency may lead to high level of risk.Opportunity • continuous private sector housing boom will create more construction opportunities. • Public sector projects through Public Private Partnerships will bring further opportunities. • Developing supply chain through involvement in large projects is likely to enhance the chances in construction. • Renewable energy projects will offer opportunities to develop skills and capacity in new markets. • More flexible training delivery techniques are now available.
• Financial supports like loan and insurance and growth in income of people is in support of construction industry. Building, Construction Industry and Real Estate Services • Historical cultural heritages like the TAZ MAHAL encourage and provide a creative platform for the industry. • Remote areas in the country are easily accessible and plenty of land is available in the country.Threat • Long term market instability and uncertainty may damage the opportunities and prevent the expansion of training and development facilities. • Current economic situation may have an adverse impact on construction industry. • Political and security conditions in the region and Late legislative enforcement measures are always threats to any industry in India. • Infrastructure safety is a challenging task in construction industry. Porter’s five forces Model1. Intensity of Industry Rivalry (Neutral to Favorable)Compared to many other industries, the intensity of rivalry among developers in residentialdevelopment is relatively low. The area where it is felt most is in competition fordevelopment land. When it comes to selling end units, developers typically try to avoidcompeting directly by 1) developing products in different markets / locations; 2) launchingproducts at different time periods; 3) differentiating product types.The key factor is that residential property is sufficiently differentiable and not subject toany sort of perishibility or technological obsolescence such that developers have muchmore flexibility with the timing of producing and selling their end product.
Building, Construction Industry and Real Estate Services 2. Threat of new entrants (Neutral to Unfavorable) When an industry has over 60,000 registered participants, it is hard to conclude that barriers to entry are high. Although the number of entrants varies over time and according to market condition, they are sufficiently low relative to other industries that new entrants can continue to enter and eventually push above average returns back to historical means. Generally speaking, the potential barriers to entry to any industry fall into several broad categories: 1) capital; 2) technology; 3) legal authorization; and 4) expertise and know-how. Legal authorization is necessary for certain types of industries such as telecoms and utilities. The number of participants in these industries is limited due to the nature of the businesses (“natural monopolies”) or the return profiles (massive upfront investments which can only be recovered through limited operating competition). For most real estate development, no special legal authority is needed to enter the industry. That is why many non-property companies find it relatively easy to migrate into this industry as and when returns become attractive or simply out of interest. Furthermore, the technological and expertise/know-how component of this industry is not particularly high. Designs, names and concepts can all be copied as there is less ability to protect these through patents or copyright. Large value supply chains such as agents, consultants, property managers and employees of rivals can all be hired or co-opted. Capital can be considered a barrier but mostly to larger scale projects. The gross amount of capital needed to “enter” the industry is paltry compared to the likes of steel mills or chip fabs. In addition to the above factors, the wide range of different types and scales of development each entail different barriers to entry. Obviously larger, more specialized developments in top tier cities would have much higher barriers to entry than a small residential project3. Threat of substitutes (Favorable for End Use; Neutral for Investment) Real estate development involves different types of products - residential, office, retail and industrial being the most common. To narrow the scope of discussion, we will just consider private residential real estate. Currently in China, residential real estate is in high demand both for its utilitarian value as accommodation and also for its investment value as a stable, inflation- proof store of wealth. As such we need to consider the substitutability on both
fronts.As accommodation, new private housing from any firm can be replaced by 1Building, Construction Industry and Real Estate Servicescompetitive product from another developer; 2) existing private housing for sale or for rent; 3)social housing either for sale or rent. Any specific developer can lower the risk ofsubstitution by differentiating their product offering by i) location; ii) type and iii) quality.The more generic a developer’s product，the more substitutable . Developers that havemanaged to distinguish their product or image will fare the best. The threat from the secondary market varies by city. In T1 and large T2 cities, a sufficiently large stock of housing exists for the secondary market to be a viable choice for potential homebuyers. In many T3 and T4 cities, there are either not enough secondary units for sale or the market is simply is too illiquid. The threat from social housing exists but not significant. Usually, those allowed to buy or rent social housing would only be able to enter the low end of the private housing market anyway - if at all. Moreover, resale and other restrictions make it a far less liquid asset class. For that reason, the threat is only to the lower end of the private housing market. Given China’s current state of negative real interest rates and capital controls, most individuals have limited channels for savings and investment. Real estate has helped fill this void. If investors were given more alternatives and if other asset classes such as equities start to perform better, investment demand for real estate would quite likely cool. 4. Bargaining power of suppliers (Favorable) Overall, developers are in a favorable bargaining position relative to the key suppliers in the industry. The 3 key suppliers to any residential developer are 1) land sellers (usually cities or other developers); 2) construction contractors; 3) building materials and home furnishing / equipment manufacturers; 4) capital providers. This situation is more or less reflected in that the typical cost of sales for any developer is made up of roughly 1/3 land, 1/3 construction and 1/3 financing costs. A typical developer’s bargaining position relative to a land seller varies according to 1) nature of sale and 2) location of sale. Developers typically prefer to buy land through direct bilateral negotiations with the government or 3rd party rather than be involved in a multi-party bidding ware. Auctions are the least desired channel for land acquisition but sometimes a necessity. For land bought in smaller cities or newer areas of larger cities, developers wield a lot more bargaining power. Smaller cities are generally eager to entice well known national developers. For example, if Vanke or COLI buys into a smaller T3/4 city, it would signal to other developers that this city is worthy of investment. In such cases, local officials are willing to give a discount to entire desired players. This logic is also true of newly emerging districts in T1/2 cities. Construction companies do not command much if any pricing power and many
work on thin margins. Although developers can backward integrate and take on construction duties themselves, this is often more for ensuring timeliness of completion or maintaining quality standards than for cost savings. Also, theBuilding, Construction Industry and Real Estate Servicesconstruction materials and household furnishings that developers buy are mostlycommodity goods for which the manufacturers not only command no particularpricing power but would also yield a discount on bulk or volume purchases. Lastly, capital providers, be they banks, shareholders or bondholders, may have different investment appetite for this industry at different times but whether investors or bankers demand a specific risk premium to provide capital is more dependent on the perceived risks at any point in the property cycle and not any kind of structural risk premium. 5. Bargaining Power of Buyers (Neutral) Of all the five forces, this is perhaps the most dependent on 1) the stage in the industry cycle; 2) regulations to protect consumer interests and 3) financial state of individual developers. Given this wide variance, it is very difficult to conclude definitively that buyer power is always strong or always weak. The truth is buyer power will fluctuate greatly. Thus developers that have a larger proportion of their business in markets with weaker buyer bargaining power will obviously realize higher returns. Near the peak of a property cycle, the combination of investment and end user demand generally outstrip available supply. This gives developers tremendous pricing power and leads to outsized returns. Conversely, near the bottom of the cycle, developers are usually overstocked and must cut prices to move units. In the transaction of any large sized purchases, information is the key to knowing what a reasonablprice to pay is.
Figure 1 Property Cycle In the absence of rules and regulations, Building, Construction Industry and Real Estate Servicesdevelopers often maximize revenue bytrying to extract the maximum possible price for each unit. They can do this by 1) not publishing any standard price lists and 2) not reporting critical information such as how many units have been sold and at what price. This situation is generally known as asymmetric information and gives the developer tremendous power. However, in most large markets, regulators are aware of this and have enacted laws to protect consumer interests by making information more transparent and readily available. In general, all else being equal, consumers in T1/2 cities or those with consumer protection laws have more bargaining power than cities without protection. Lastly, developers that are on solid financial footing (larger resulting from a more prudent management of working capital) would generally have greater pricing and operational flexibility than those that are financially overstretched heading into a cyclical trough.
Building, Construction Industry and Real Estate Services QuantitativeReal Estate Industry: A Financial AnalysisI have attempted to capture the current trends in the Indian real estate industry through financialanalysis of a sample of listed companies. This section provides a brief overview of the performance ofthe sample of listed real estate companies.The sample selected for this analysis comprised listed real estate companies that had total income of र750 mn and above. We then narrowed down its choice to a fair representative list of 30 companies forwhich financial information was available for the past five years.It further categorised the 30 real estate companies into large-size, mid-size, and small-size companiesbased on their total income, by using the 80:15:5 principle. Based on this categorisation, 12, 10, and 8large-size, mid-size, and small-size companies respectively were chosen.This classification primarily aims to study the dynamics and operating efficiencies of the chosencompanies in the real estate industry. Of the 30 companies under study, in FY10, large companiescontributed 80% of total income and had 40% representation.Debt- equity RatioReal estate companies require significant resources to fund their projects. Thus, they went on an equitycapital raising spree during FY06–FY08 to scale their operations aggressively. These companies alsoprocured considerably high debt to finance their capital-intensive projects.However in FY09 and FY10, growth in equity and debt declined due to decreased demand, a downtrendin sales, stoppage in execution of projects, rising interest expenses and the credit crunch arising out ofthe global financial crisis.The global financial crisis, volatile capital markets, slowdown in FII flows made it difficult forcompanies to raise funds through equity markets.Further, in FY10, the focus of companies was to enhance cash flows, release cash blocked in non-coreassets, increase process improvements and cost cutting, and achieve better working capital managementalong with real estate development. This resulted in renewal and progress of certain stalled projects andnew launch announcements.ROCEThe return on capital employed (ROCE) is a measure of returns that a company is realising from capitalemployed. ROCE is defined as the ratio of profit before interest and taxes (PBIT) to capital employed.
Another factor that led to a sharp decline in ROCE of real estate players is increase in capital employedat a higher pace than PBIT growth. In fact, small and large companies registered a sharp decline inPBIT as against a positive growth in capital employed, which had a double effect on ROCE. In FY10,PBIT of mid-size companies grew at a lesser rate of 19.7% compared with 27.8% growth in capitalemployed. However, large and small companies saw a decline in PBIT of 20% and 30.2% comparedwith 25.3% and 8.6% growth in capital employed.Fixed Asset Turnover RatioFixed Asset Turnover ratio shows that 12.32% . FATR is mostly modest leaving one firm, which tellthat most of the companies were able to sail out with much fixed asset harm. Compound Annual Growth Rate - CAGR ( Revenues )Company March Mar’11 Mar’10 Mar 09 Mar 08 CAGRName 2012DLF 10,207.88 10,091.54 7,791.31 10,392.55 14,655.01 -6.98%Omaxe 62.90 62.51 90.77 78.12 398.80 -30.88%UNITECH 326.71 510.08 544.30 739.66 1030.68 -20.53%ANSAL API 10.32 10.55 6.41 10.06 7.24 7.39%Parsvnath 25.53 75.48 133.85 113.04 408.74 -42.57%DevelopersLtd.GODREJ 81.36 106.24 121.84 74.74 75.89 1.47%PROPERTIESLTDReal Estate 10714.7 10856.4 8688.48 10668.51 16276.36 -8.02%Where,Formula : start value, : finish value, : number of years. Actual or normalized values may be used for calculation as long as they retain the same mathematical proportion. The CAGR can also be calculated as the geometric mean of 1 plus each years return (i.e. +3% becomes 1.03 and -2% becomes 0.98), minus 1
Analysis:CAGR of Real Estate industry has Been -8.02, which clearly signifies that industry has beenBuilding, Construction Industry and Real Estate Servicessuffering from low earning capability over 5 years or so. The main reason for such Drastic fall is“recession” , which has made consumer reluctant to invest. It was backed by Raising interest Rates. Cumulative Average Growth RateInterpretation • Real Estate is suffering from down turn of cumulative average growth rate. • A -340 % of decrease show that industry is not healthy right now. • Recession has had adverse effect on Indian real estate industry.Suggestion • Real estate companies has to inject money to start new projects. • Companies have to formulate effeicient policies to skip florclosures.
Building, Construction Industry and Real Estate Services 2.6. Profile of Investments and Projected Industry Size Given the skill requirements outlined in the earlier section, it is also necessary to forecast the human resource requirement required in the Infrastructure and Real Estate sector. The first step is to forecast the industry size. In this section, we will analyse the profile of investments planned in each of the sectors and arrive at the projected industry size. 2.6.1. JnNURM According to Indias Census in 2001, more than 285 million people (27.8% of the total population) live in urban areas. With this large base, which is growing at the rate of around 2.7% annually, India has the worlds second largest urban population. Given the current trends in population growth and migration, Indias urban population is estimated to reach 575 million by 2030. Consequently, the Jawaharlal Nehru National Urban Renewal Mission (JnNURM) was set up to encourage reforms and fast track planned development of identified cities. Focus is to be on efficiency in urban infrastructure and service delivery mechanisms, community participation, and accountability of Urban Local Bodies 12 (ULBs)/Parastatal agencies towards citizens. The current list of 65 cities under JnNURM together host around 120 million residents, which constitutes 42% of all urban residents in the country, or 12% of total Indian population. For the 65 cities identified under the JnNURM, the total investments are expected to be over Rs. 3,35,000 crore directed towards Urban Infrastructure and Governance (UIG), Basic Services to Urban Poor (BSUP) and Capacity Building and Institutional Development (CBID). Of these investments in Urban Infrastructure and Governance (UIG) account for over 80% of the total investments under the JnNURM, as below: 12 Including inputs on addition or deletion of cities/ UAs/towns, the total number of cities under the JNNURM will remain around 60 – the figure of 63 cities has recently been revised to 65 cities.
Building, Construction Industry and Real Estate Services Figure 16: Investment planned under JnNURM totalling Rs. 3,35,000 crore Basic Services Capacity C to Urban Poor Building and (BSUP) Institutional 17% Development (CBID) 1% Urban Infrastructure e and Governa nce (UIG) 82%As part of Urban Infrastructure and Governance, investments are being made under the heads ofUrban Transport, Water Supply, Sewage/Sanitation, Drainage/Solid Waste Disposal, MRTS, andSolid Waste Management. Of these, the investments in Urban Transport, Water Supply, Sewage/Sanitation account for about 80% of the total investments under the JnNURM, with Urban Transportalone accounting for over 50%, as seen below: Figure 17: Investments under various heads of JnNURM (Rs. crore) Urban Transport 137,391 t 9 Water Supply 40,062 0 Sewage / Sanitation g n 33,324 2 Drainage / SWD 20,100 s Others 16,762 S MRT 12,050 M SWM 6,809 9 - 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 8With respect to the states, investments in Maharashtra, Tamil Nadu, Andhra Pradesh, Delhi, UttarPradesh, Karnataka, Kerala, Gujarat, Jharkhand and West Bengal account for over 80% of totalinvestments under the JnNURM, as seen below: