Tuesday, November 7, 2006

Real Estate Sector review

I'm glad to have readers like Deepa who has some interesting insights and would like to know more about real estate sector. Here I make an attempt to understand the goings on in the Real Estate sector and how and why it is a good investment option.

  • The Tenth Five Year Plan has estimated a shortfall of 22.4 million dwelling units in the country. According to one estimate, over the next 10 to 15 years 80 to 90 million housing units will have to be constructed.
  • The investment required for constructing these dwelling units and for providing related infrastructure during this period will be of the order of $666 billion to $ 888 billion at roughly $33 billion to $44 billion per year ($ 1 billion = Rs 4,400 crore).
  • The real estate prices have stabilised and showing a steady growth after the boom and crash in the mid 1990s.
  • There is a steady growth in Housing Finance sector of approx.30 % over last four years.
  • The rate of interest for housing finance has become reasonable and affordable which has resulted into more credit offtake and subsequent maturing of the housing industry. Even though there is an increase, the rates are still reasonable to my mind after factoring in the tax benefits.
  • Fiscal benefits provided by the Government of India have encouraged the end users and investors alike.
  • Income of the urban buyer has grown substantially.
  • There is tremendous scope and growth in the Infrastructure Development.
  • Foreign investment by way of FDI has been approved.
  • Emergence of professional builders in the market with proper accounting standards.
    Emergence of rating systems for building projects.
  • The high growth of the real estate sector has led a lager financial institution to launch a dedicated real estate fund. These funds are simultaneously enticing large institutional investors as well as High Net worth Individual (HNIs) to expand their portfolio.
  • Last year in July, 2005 SEBI approved the country’s first venture capital fund, HDFC Property Fund, in real estate. Thus SEBI has not allowed to a property fund to come up as a mutual fund but as a venture capital fund. This will allow only the high net worth individuals and corporates to subscribe for this fund. HDFC board had approved the corporation’s entry into business of real estate venture fund after SEBI amended, the venture fund act.
    With the real estate prices of both residential and industrial properties in major cities sky-rocketing in the last two years and with housing still remaining a major bottleneck for urban planners and developers, the bullish outlook on the real estate market is justified. And many are projecting a 15-25% growth for the sector in the next 5 years.
  • A report by the CII has pointed out that globally the real estate is and should always be considered as an attractive investment option.
  • The scrips in the construction sector are doing very well. The Mutual Funds who have invested in Infrastructure stocks are doing well too.
  • Key Construction stocks to my mind are Gammon, GMR, Mahindra Gesco, Hind, Patel Engg., Era Constructions.

RBI thinks the real estate sector is a bit heated up or prone to be over heated. So there might be some go slow on Real Estate Mutual Funds and Real Estate Investment Trusts (REIT) but they are bound to come, sooner or later.

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