The Hindu Business Line : `Realty market in India on high growth curve'

THE real estate market in India is on a high growth curve, on the back of a booming economy, favourable demographics and liberalised FDI regime, although issues such as lack of land reforms, and absence of substantial tax incentive for real estate development still need to be addressed.

"In India's fast-growing economy, real estate has emerged as one of the most appealing investment areas for domestic as well as foreign investors. The real estate sector will continue to derive its growth from the booming IT sector, since an estimated 70 per cent of the new construction is for the IT sector," a report by PricewaterhouseCoopers has said.

The report, which has a chapter dedicated to the Indian market, further said that besides the demand from the IT sector, the basic need for modern real estate would provide lucrative opportunities for investment.

"Low interest rates, modern attitudes to home ownership (the average age of a new homeowner is now 32 years compared with 45 years a decade ago), economic prosperity along with a change of attitude amongst the young working population from that of `save and buy' to `buy and repay' and liberalised FDI regime have all contributed to this boom," it said.

Listing out the challenges for the real estate market in India, the report said that Indian Government's tax policy was not in tandem with the liberalisation initiatives being undertaken in the sector.

"There are no substantial tax incentives for real estate development except in the limited circumstances. Even in these situations, the tax incentive windows have a short life left. The prevailing tenancy laws in India are not in favour of owners of the land," it said.

The Urban Land Ceiling Act and Rent Control Acts have distorted property markets in cities, leading to exceptionally high property prices, it said. Moreover, a high percentage of land holdings do not have clear titles.

"Land is generally non-corporatised and is typically held by individual or families. This restricts organised dealing, and hinders transfer of titles. Legal processes for property disputes are time consuming," the report said, adding that despite repeated calls for the rationalisation of stamp duties, they continued to be as high as 10-13 per cent in certain states.

"Once the Government puts into place land reforms and addresses the challenges facing the real estate sector, this sector has the potential to contribute immensely to the country's GDP," it said.

The report said that although Government has not undertaken capital market level deregulation measures, such as allowing REITs (whether domestic or foreign owned) to operate in India, in 2004 it had allowed international and domestic companies to operate real estate funds/pooled vehicles through the private equity fund route.

The move combined with the boom in the real estate market opened the doors for a host of realty funds.

"While most funds were initially floated by financial Institutions or banks such as HDFC, ICICI Bank and Kotak Mahindra Bank, real estate developers like DLF Universal and even retailers such as Pantaloon have now entered the arena for creating more retail facilities. Most of the funds floated in the recent past have received a strong response from investors. Reports suggest that over the past six months, about $500 million has already flowed into the real estate sector," it said, adding that the flow may rise to a massive $7-8 billion over the next 18-30 months.

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