Realty and Infrastructure Sector: Indian Case Study

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The 2009-10 budget has also given sops to the realty sector. Developers of affordable housing projects (units of 1,000-1,500 sq ft) have been granted a tax holiday on profits from projects initiated in the financial year 2007-08. Such projects would have to be completed before March 1, 2012.

At the same time, the finance minister allocated US$ 207 million to grant a 1 per cent interest subsidy on home loans up to US$ 20,691, provided the cost of the home is not more than US$ 41,382. This subsidy is expected to give a further boost to the housing sector.

Investors are only required to notify the concerned Regional office of RBI within 30 days of receipt of inward remittances and file required documents with that office within 30 days of

issue of shares to foreign investors.

List of Infrastructure Sectors with FDI Upto 100% under Automatic Route are as follows:

•Electricity Generation (except Atomic Energy)

•Electricity Transmission

• Electricity Distribution

• Mass Rapid Transport System, including associated commercial development of real estate

•Roads & Highways

•Toll Roads

•Vehicular Bridges

•Ports & Harbors

•Hotel & Tourism

• Townships, Housing, Built-up Infrastructure and Construction Development Project

• Setting up/ development of industrial park/ model town/SEZ- 100%FDI under Automatic Route

Automatic Route is not available to those foreign investors who already have a financial or technical collaboration in the same or allied field.

Why investing in Indian Realty & Infrastructure Sector

Flying high on the wings of booming real estate, property in India has become a dream for every potential investor looking forward to dig profits. All are eyeing Indian property market for a wide variety of reasons:

It's ever growing economy which is on a continuous rise with 8.1 percent increase witnessed in the last financial year. The boom in economy increases purchasing power of its people and creates demand for real estate sector.

India is going to produce an estimated 2 million new graduates from various Indian universities during this year, creating demand for 100 million square feet of office and industrial space.

Presence of a large number of Fortune 500 and other reputed companies will attract more companies to initiate their operational bases in India thus creating more demand for corporate space.

Real estate investments in India yield huge dividends. 70 percent of foreign investors in India are making profits and another 12 percent are breaking even.

Apart from IT, ITES and Business Process Outsourcing (BPO) India has shown its expertise in sectors like auto-components, chemicals, apparels, pharmaceuticals and jewellery where it can match the best in the world. These positive attributes of India is definitely going to attract more foreign investors in the near future.

Why Invest in India?

Investment scenario has certainly undergone a paradigm shift in India. Gone are the days when potential investors used to sought after investment options like equity bonds and park money in shares where your return ranges between 5.55 to 6%. Data showcased by property surveys show that returns from rental incomes on investment in commercial property in Indian metros, is around 10.5%, the highest in the world.

Key Facts

Selling and buying Indian property is now considered as the most profitable and attractive business opportunity in the present real estate scenario in India. New demands have added to strength of real estate markets across the commercial, residential and retail sectors in India. Not surprisingly, demand for Indian property has been increasing steadily for the past few years and it has exceeded supply.

There has also been an upward swing on the real estate price values in the recent years. Due to the huge demand and rising prices, investment and speculative interest in real estate is growing while excess money supply, stock market gains and policy changes are adding to the trend in favor of the real estate sector.

In the last one year, the capital values of the commercial office spaces has increased by up to 40% owing to the increase in the demand from IT / ITES and BPO sector across major metros in India.

India has a distinct regulatory and financing management in place.

Real estate boom in India is supported by its own flourishing economy on a sustainable basis. Here, growth of the property market is not a result of renovation and overhauling; but rapid development that witness for India riding the high growth wave. 

Factors favoring Investments

Tremendous growth has been taking place in both residential as well as commercial segments that is attracting huge investments phenomenal price escalation (more than 100% in several places) in last couple of years.

Lower interest rates, easy availability of housing finance, burgeoning income and better job prospects, increase of nuclear families have given a boost to the demand for residential properties in India. The net yields (after accounting for all outgoings) on residential property are currently at 4-6% p.a. However, these investments have benefited from the improving residential capital values. As such, investors can count on potential capital gains to improve their overall returns. Capital values in the residential sector have risen by about 25-40% p.a in the last 2 years.

The retail market in India has been growing due to increasing demand from retailers, higher disposable incomes and opening up of FDI in Retail. The capital appreciation in this sector is close to 20-35% p.a. However, the risks associated with this sector are higher as retailers are prone to cyclical changes typical of a business cycle. Changing consumer behavior combined with increasing disposable incomes will ensure further growth of the retail sector in India.


Indian economy continues to grow and presents significant opportunities for investors over the next 5 to 10 years:-

â-º India is the fourth largest economy in the world in terms of Purchasing power parity GDP and the twelfth largest economy in the world in terms of absolute GDP, with GDP in nominal terms for fiscal 2007 of over $1 trillion. In recent years,

â-º India has experienced rapid economic growth. India's GDP at constant prices grew at 7.5%, 9.0%, and 9.4% in fiscal 2005, 2006, and 2007, respectively.

â-º we believe this growth will continue supported by increased domestic consumption and

further industrial expansion. Concurrently, real estate investments, and thus values, have boomed.

â-º Historically, the real estate sector in India has been unorganized and characterized by various factors that impeded organized dealing. In recent years, however, the real estate sector in India has exhibited a trend towards greater organization and transparency, accompanied by various regulatory reforms.

â-º CRIS INFAC, a leading research agency, expects cumulative investments of Rs. 5,106 billion ($130 billion) in real estate-related construction, leading to 8,288 million sq. ft. of additional space between 2006 and 2008.

Rajeev Malik, Head, India and ASEAN Economics, Macquarie Securities Group, gave his views on where to invest money. Well for me personally, real estate in some cases still looks more attractive. At the end of the day, it is very much an individual risk appetite and portfolio requirements as such. Equities would be an important point. Bonds look rather risky in the sense that even if you look at the US, it has already had a pretty good run with the broader dynamics, there, it is difficult to see why yields are not going to go higher, especially with the monetary cycle a few quarters down the line shifting gears.

In India, specifically you come into the broader issue that from a foreign investor perspective, equity markets remain the most open and they have had the best possible run. I also think specifically with equities in India, there is a sizable number of foreign investors who have not had a chance to gain exposure to the extent that they would want for a kind of a secular story and that's emerging in India, which perhaps might explain why every time you see some correction, 10% or so, it always tends to trigger a bit more buying.

According to the real estate experts, the prospect of getting superior returns in the U.S combined with less asset price distort the risk-reward balance in opposition to upcoming realty markets of India. Thus, there is a high probability of foreign investors avoiding the Indian real estate market.

According to another expert retardation of general growth and low interest rates have served as a double blow to the real estate developers even as the alleged risk-reward ratio for India is going downhill. For instance, the pension funds in US have the opportunity to invest in India or other markets. They opt for other option because of better level of available information. According to another expert in real estate, there is no developmental liability in other markets as these are existing properties. Further, the absence of political or currency risk and the prospect of approximately 18-20% returns in the US make it very attractive for investment and, they are not particularly eyeing for additional 5% they may gain coming to India. Considering the elevated risk that the investors have to take in India, this minor extra return seems to be rather inadequate.

This might be an early phase but, for investments, it may result in investments decisions against Indian market. Investors have plenty of doubts and asking many questions and deals are getting cancelled. Term-sheets are deferred. Citi Venture and AIG backed out of a proposed investment of Rs 1500 crore to be made in Mumbai-based real estate developer Akruti City in April. There is a hold-up or delay because of slow decision-making by the PE majors. According to the experts, this is happening because PE majors are not sure. However, developers are commencing to recognize the actuality and coming with better terms and condition. This is clear from the financing terms that they are accommodating nowadays with the growing demand of economy.

If a developer and a PE major invested in a ratio of 75:25, the profit-sharing was partial to promoters by the ratio of 60:40 beyond a specific interest rate of 15-16%. This has now become almost 20-22%. The coming year could lead to more confusion, as inflation would elevate the rates of interest rates. Deficit financing for oil subsidy would also place the economy in much strain. And thus real estate in India is all set for a hard time. This indicates an end of the days of extraordinary profits, and real estate developers would be forced to price their products affordably. Further, the passion to purchase lands would slow down and consequently India property prices would be corrected. The aggressive land purchasers, having a tendency to acquire lands in large scale will definitely be in a restrained mode for inadequacy of fund. A rectification in this regard will be good option.

In India there is much chance for the real estate as there is tremendous increase in ventures, which r required by the people (for houses), factories, industries, IT centres, shopping malls, and other large things. And even population is increasing and there will be need for new ventures. Money is increasing and each and every person looks after a good house in case if he is a job holder and for a business man a big venture.So real estate is good In India in 2010 or after. And in case u r asking about the shares and the real estate part in the trading, still it is good if u invest when the markets fall and sell them when u see a good change in market conditions. And they r saying the bad time is over and from now the market may be in positive trend. Be cautious while investing.

In the present day scenario, if there is any powerful investment tool that brings burgeoning financial returns, it is INDIAN REAL ESTATE!!! Investors should consider the parameters minutely and meticulously to find out why investing in Indian real estate now is the best viable option.


Intrinsic value: The intrinsic value is the true economic worth of a financial asset. The fundamentalists maintain that at any point of time every share has an intrinsic value which should in principle be equal to the present value of the future stream of income from that share discounted at an appropriate risk related rate of interest.

Beta: A quantitative measure of the volatility of a given stock, mutual fund, or portfolio, relative to the overall market, usually the S&P 500. Specifically, the performance the stock, fund or portfolio has experienced in the last 5 years as the S&P moved 1% up or down. A beta above 1 is more volatile than the overall market, while a beta below 1 is less volatile.

Market Return (Rm): Stock Market Returns are the returns that the investors generate out of the stock market. This return could be in the form of profit through trading or in the form of dividends given by the company to its shareholders from time-to-time. The market return computed was 14.35%.

Risk Free Return (Rf): A theoretical interest rate that would be returned on an investment which was completely free of risk. The 3-month Treasury bill is a close approximation, since it is virtually risk-free. The available risk free return is 8%.

Expected Return: Estimation of the value of an investment, including the change in price and any payments or dividends, calculated from a probability distribution curve of all possible rates of return. In general, if an asset is risky, the expected return will be the risk-free rate of return plus a certain risk premium, also called expected value.

Chapter 2



Outlook on Indian Stock Market

Indian Stock Market is one of the oldest in Asia. Its history dates back to Nearly 200 years ago. The earliest records of security dealings in India are meager and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century.

By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In1860-61 the American Civil states to Europe was stopped; thus, the 'Share Mania' in India began .The number of brokers increased to about 200 to 250.