Overview of Indian Infrastructure, Real Estate & Construction Industry:

The construction sector is the second largest employer in India after agriculture.

Currently, the construction industry in India, directly or indirectly, employs

approximately 32.0 million workers and also accounts for 40.0% of gross investment

and 60.0% of infrastructure costs. The construction sector accounts for a gross

annual business volume of Rs.2,300 billion and accounts for 5.0% of India‟s GDP

(India‟s total GDP is approximately $1 trillion).

Investment in the construction sector may be broadly classified into the following

categories:

• Infrastructure construction investments (i.e. roads, urban infrastructure, power,

irrigation and railways)

• Industrial construction investments (i.e. steel plants, textiles plants, oil pipelines

and refineries)

• Real estate construction investments (i.e. residential and commercial construction)

Growth in the construction industry is expected to be led by growth in infrastructure

and industrial construction investments, which are expected to grow at a faster rate

than real estate construction investments. Consequently, the share of real estate

construction investments in total construction investments is expected to fall.

Nevertheless, real estate construction investments will continue to be the biggest

component of total construction investments.

Factors driving infrastructure growth:

• Political will: Building further on the initiatives taken by previous governments, the

current GoI is undertaking several measures to enhance investments in the

infrastructure segment.

• Funding from multi-lateral agencies: Multilateral agencies such as the World Bank

and the Asian Development Bank (“ADB”) are funding various infrastructure projects

on a large scale in India. Agencies such as the Japan International Bank for

Cooperation (“JIBC”), which funded the Delhi Metro (Underground Railway) Project,

are also providing funding to the sector. Various state governments are mobilizing

funds from these agencies to support rural roads and sanitation projects.

The Role of the Private Sector in Infrastructure Development – Public

Private Partnership

Historically, the government has played a key role in supplying and regulating

infrastructure services in India and private sector has not participated in

infrastructure development. However, due to the public sector‟s limited ability to

meet the massive infrastructure funding requirements, private sector investment in

infrastructure is critical. Therefore, the Indian government is actively encouraging

private investments in infrastructure. According to World Bank, India needs to invest

an additional 3-4 % of GDP on infrastructure to sustain its current levels of growth in

the medium term and to spread the benefits of growth more widely. (Source: India

Country Overview 2009, World Bank)

In order to boost the participation of the private sector in road development, the

Government has planned the following initiatives:

• The Government will carry out all preparatory work, including land acquisition and

utility removal. Right of way will be made available to contractor, free from all

encumbrances.

• National Highway Authority of India (NHAI)/the Government will provide a capital

grant of up to 40% of the project cost to enhance viability on a case-by-case basis

evaluation.

• The contractor will receive a 100% tax exemption for five years and 30% relief for

the following five years, which may be utilized in 20 years.

• Permitted concession period of up to 30 years.

• Duty free importation of specified modern high capacity equipment for highway

construction.

(Source: Public Partnerships in India, Ministry of Finance, Government of India)

TYPES OF CONTRACTS IN THE CONSTRUCTION AND INFRASTRUCTURE

SECTORS

Build-Operate-Transfer (“BOT”)

Under this type of Public Private Partnership (PPP) contract, the Government grants

to a contractor a concession to finance, build, operate and maintain a facility for the

concession period. During the concession period, the operator collects user fees and

applies these to cover the costs of construction, debt-servicing and operations. At

the end of the concession period, the facility is transferred back to the public

authority. BOT is the most commonly used approach in relation to new highway

projects in India, and is also used in the energy and port sectors. BOT projects can

be annuity-based or toll-based, as defined below:

• BOT annuity-based projects: Under this form, the concessionaire is responsible

for constructing and maintaining the project facility. The GoI, usually through the

National Highways Authority of India (“NHAI”) in the case of highway projects, pays

the concessionaire a semi-annual payment, or annuity. Under this approach, the

amount of income collected by the concessionaire is not directly related to the usage

level of the project. In the context of highway projects, the amount of income is not

by direct reference to the number of vehicles using the highway. Instead, the risk

that traffic, and consequently user fees, may be lower than expected is borne by the

NHAI alone.

• BOT toll-based projects: In order to reduce the dependence on its own funds

and to promote private sector involvement in developing projects, the NHAI has

awarded some highway projects on a toll basis. In this case, the concessionaire is

responsible for constructing and maintaining the project as well as being allowed to

collect revenues through tolls during the concession period. After the expiry of the

concession period, the project is transferred back to the NHAI.

Build-Own-Operate-Transfer (“BOOT”)

BOOT contracts are similar to BOT contracts, except that in this case the contractor

owns the underlying asset, instead of only owning a concession to operate the asset.

For example, in the case of hydroelectric power projects, the contractor would own

the asset during the underlying concession period and the asset would be transferred

to the Government at the end of that period pursuant to the terms of the concession

agreement.

Design-Build-Finance-Operate (“DBFO”)

The NHAI is planning to award new highway project contracts under the DBFO

scheme, wherein the detailed design work is done by the concessionaire. The NHAI

would restrict itself to setting out the exact requirements in terms of quality and

other structures of the road, and the design of the roads will be at the discretion of

the concessionaire. The NHAI expects that the DBFO scheme will improve the design

efficiency, reduce the cost of construction and reduce time to commence operations,

in addition to giving the concessionaire greater flexibility in terms of determining the

finer details of the project in the most efficient manner.

Item Rate Contracts

These contracts are also known as unit-price contracts or schedule contracts. For

item rate contracts, contractors are required to quote rates for individual items of

work on the basis of a schedule of quantities furnished by the customer. The design

and drawings are provided by the customer. The contractor bears almost no risk in

these contracts, except the risk of an escalation in the rate of items quoted by the

contractor, as it is paid according to the actual amount of work on the basis of the

per-unit price quoted.

Engineering Procurement Construction/Lump-Sum Turnkey

(“EPC/Turnkey”) Contracts

In this form of contract, contractors are required to quote a fixed sum for the

execution of an entire project including design, engineering and execution in

accordance with drawings, designs and specifications submitted by the contractor

and approved by the customer. The contractor bears the risk of incorrect estimation

of the amount of work, materials or time required for the job. Escalation clauses

might exist in some cases to cover, at least partially, cost overruns.

Operations and Maintenance (“O&M”) Contracts

Typically an operations and maintenance contract is issued for operating and

maintaining facilities. This could be in sectors such as water, highways, buildings and

power. The contract specifies routine maintenance activities to be undertaken at a

predetermined frequency as well as break-down maintenance during the contract

period. While the contractor is paid for the routine maintenance based on the quoted

rates which are largely a function of manpower, consumables and maintenance

equipment to be deployed at the site, any breakdown maintenance is paid for on a

cost-plus basis.

Front End Engineering and Design (“FEED”) Contracts

Ordinarily, FEED work is carried out as a part of a consultancy assignment where the

consultant provides FEED data to the project owner to enable it to take a decision on

making a tender for construction. In addition to this, the FEED is also a prerequisite

to enable a contractor to bid for EPC/Turnkey projects. A FEED project can be an

independent consultancy project or a part of an EPC/Turnkey contract.

TYPICAL RETURNS FROM PRIVATE INVESTMENTS IN INFRASTRUCTURE

Despite the critical role played by infrastructure development in growth, there still

exists a very wide gap of US$10-15 billion between the current and required levels of

private investments in infrastructure. Returns vary from contract to contract.

Typically, in an annuity, the project Internal Rate of Return (IRR) would be in the

range of 12-14 % and equity IRR would be in the range of 14 -16 %. For toll, where

the concessionaire (contractor) assumes the traffic risk, the project IRR would be in

the range of 14- 16 % and equity IRR would be in the range of 18-20 %.

Proposed infrastructure investment in 11th Five Year Plan

The 11th Five Year Plan envisages an infrastructure investment of Rs. 20,561

billion, to be shared between the Centre, states and private sector in the ratio of

37.2%, 32.6% and 30.1%. Below is the estimated level of investment in the

infrastructure sector over XI plan:

ROAD INFRASTRUCTURE

Roads investments to double over the next five years

Investment in the roads sector is expected to grow at a Compounded Annual Growth

Rate (CAGR) of 15% over the next five years, with an estimated increase from

Rs.1,167 billion in the past five years (fiscal years 2002-2006) to about Rs.2,306

billion in the next five years (fiscal years 2007-2011).

India continues to need significant investment in the road sector as the population

and economy continues to grow. The Indian road network consists of:

According to the NHAI, roads form the most common type of transportation in India

and accounted for approximately 80.0% of passenger traffic and 65.0% of freight

traffic. National highways accounts for nearly 40.0% of the total road traffic in India.

The following table sets forth information relating to the status of National Highways:

The number of vehicles grew at an average pace of 10.10% per annum over the

period from FY 2000 to FY 2004. Passenger traffic on roads as a percentage of total

passenger traffic has also witnessed a huge increase from 30% in 1951 to 86% in

2008. (Source: CRISIL Research, Road Network in India, June 30, 2009).

The focus of the road modernization program in India is the Golden Quadrilateral

(GQ) project. The flagship program to develop and upgrade Indian national highways

is the National Highways Development Program (“NHDP”). Besides NHDP, the road

sector in India is expected to see a greater level of development activity through

road programmes such as Pradhan Mantri Grameen Sadak Yojana (“PMGSY”), and

Special Accelerated Road Development Programme – North East (“SARDP-NE”) as

well as road projects at the state level.

The scope of the NHDP project is illustrated by the multi-phase approach set forth

below:

• Phase I of NHDP, Golden Quadrilateral Project (GQ) involves four-laning of

approximately 5,846 km of national highways between Delhi, Mumbai, Chennai and

Kolkata. Phase I is almost complete.

• Phase II North-South and East-West corridors (NSEW) involves upgrading of the

existing two-lane highways and the four-laning of approximately 7,274 km of

national highways connecting four extreme points of the country. Phase II is

expected to be completed by 2009/2010.

• Phase III involves the development of roads, connecting state capitals and places

of economic and tourist importance to Phase I and Phase II. Phase III involves two

development sections – Phase IIIA and Phase IIIB. While approval has been received

for the widening and the strengthening of 4,015km in Phase IIIA, only in-principle

approval has been granted for the development of 6,000 km in Phase IIIB.

• Phase IV involves the two-laning of a single lane network of approximately 20,000

km. Phase IV has only received an in-principle approval and has been planned

completely on a BOT-annuity basis.

• Phase V involves the six-laning of 6,500 km of high-density four-laned roads.

Phase V has only received in-principle approval.

• Phase VI involves the construction of expressways covering approximately 1,000

km of national highways. Phase VI has only received an in-principle approval.

• Phase VII involves the development of ring roads, by-passes, over-bridges,

flyovers, etc. Phase VII is still in a conceptual stage.

Source: CRISIL, Roads and Highways Annual Review, September 2006.

The table below sets forth the status of the NHDP as at June 30, 2009:

The targets for completion of the various components of the NHDP are as follows:

(Source: Plan Document, 11th Five Year Plan; CRISIL Research, NHDP Review & Outlook, Feb 23, 2009)

THE REAL ESTATE SECTOR IN INDIA

The Indian real estate sector involves the development of commercial offices,

industrial facilities, hotels, restaurants, cinemas, residential housing, retail outlets

and the purchase and sale of land and land development rights.

Historically, the real estate sector in India has been unorganized and characterized

by various factors that impeded organized dealing, such as the absence of a

centralized title registry providing title guarantees, a lack of uniformity in local laws

and their application, non-availability of bank financing, high interest rates and

transfer taxes and the lack of transparency in transaction values. In recent years,

however, the real estate sector in India has exhibited a trend towards greater

organization and transparency, accompanied by various regulatory reforms. These

reforms include:

• GoI support for the repeal of the Urban Land Ceiling Act, with nine state

governments having already repealed the Act;

• Modifications in the Rent Control Act to provide greater protection to homeowners

wishing to rent out their properties;

• Rationalization of property taxes in a number of states; and

• Computerization of land records.

Real estate investments are expected to grow from Rs.10,218 billion invested

between 2002-2006 to Rs.18,517 billion over 2007-2011.

RESIDENTIAL REAL ESTATE

The main factors that are driving demand in the residential segment are described in

more detail below:

Changing demographics and increasing affluence:

India‟s demographics have been impacted by large increases in employment

opportunities, people in the earning age bracket (25 to 44 year olds) and higher

salaries. Such factors are increasing disposable incomes and driving demand for new

residential and retail properties.

The table below shows historic and projected annual growth rates for different

segments of India‟s population, classified by levels of annual income. The figures

highlight that strong growth is expected especially in the higher income segments.

For example, the number of households with annual incomes of between Rs. 2

million and Rs. 5 million per year, Rs. 5 million and Rs. 10 million per year and in

excess of Rs. 10 million per year is expected to increase in size by 23%, 26% and

28%, respectively, between financial year 2002 and 2010, as illustrated by the table.

These higher income segments of India‟s growing middle class are expected to

provide a strong impetus for the continued development and growth of the Indian

real estate sector.

Large segment of the population economically active:

India‟s growing population in the earning age bracket is recognized as a key driver of

growth in housing demand. The size of India‟s main working age group, 25 to 44

year olds, has increased over the last two decades. According to CRIS INFAC

estimates, as of 2005, approximately 28.2% of India‟s population was in this age

bracket. This figure is expected to rise to approximately 30.6% by 2025, an increase

of approximately 5.5 million people each year, which could translate into a further

2.75 million new households per year. Also, the average age of a home purchaser

has fallen from 42 to 31 years old (Source: CRISINFAC Retail Finance, July 2006).

Shift in consumer preferences from renting to owning houses:

Due to the changing demographic profile in India, there has been a steady decline in

the portion of households living in rented premises. To a certain extent, this may be

attributed to rising income levels. However, with fewer properties available to rent

today and an increase in the rents being charged to tenants, consumers have

increasingly been investing in property. Factors such as the increase in the standard

of living of consumers and the greater availability of financing for consumers are

expected to fuel a further decline in the number of households renting premises

(CRIS INFAC Annual Review on Housing Industry, January 2006).

Increasing Urbanization:

India has witnessed a trend of increased urbanization as people migrate from rural to

urban areas seeking employment opportunities. According to CRIS INFAC estimates,

India‟s urban population is expected to grow at a CAGR of 2.6% over the five year

period from financial year 2005 through 2010, as illustrated in the table below.

Urban areas must accommodate this increase in population which, in turn, is

expected to increase in demand for new urban areas and townships (CRIS INFAC

Annual Review on Housing Industry, January 2006).

Shrinking Household Size:

India‟s traditional joint family (or multi-occupant) residences are gradually being

replaced by individual or smaller nuclear family residences. For example, according

to CRIS INFAC, the average size of Indian households decreased from approximately

5.52 persons in 1991 to approximately 5.30 persons in 2001. This trend is expected

to continue as factors such as increasing urbanization and migration for employment

opportunities cause a decrease in the size of the average Indian household to an

estimated 5.08 persons by 2011. Given India‟s increasing population, such

contraction in the size of the average household is expected to increase demand for

housing (Source: CRIS INFAC Annual Review on Housing Industry, January 2006).

Slum Rehabilitation Scheme (“SRS”):

One sector of the real estate development market that is unique to Mumbai is it‟s

Slum Rehabilitation Scheme. In 1995, the Government of Maharashtra initiated the

Slum Rehabilitation Scheme to be administered by the newly-created Slum

Rehabilitation Authority (SRA). The objective of the SRS is to redevelop slums in the

Mumbai area. Through the scheme, slum dwellings are replaced by residential

buildings containing flats of 225 square feet that are constructed free of cost to

former slum dwellers by private real estate developers participating in the scheme.

The government of Mumbai subsidizes this clearance and construction by granting

developers the right to develop a proportion of former slum land for their own

purposes, or by granting them transferable development rights (“TDRs”) which may

be used to develop land elsewhere in Mumbai north of the slum land concerned. In

other words, in exchange for the construction of flats for slum dwellers, real estate

developers are allowed to construct residential, commercial and retail properties on

slum land, whether it is government or private land, which they can then freely sell.

Moreover, TDRs permit developers to develop land in certain parts of Mumbai that

are outside the rehabilitated slum area. A TDR is made available in the form of a

certificate issued by the municipal corporation of Mumbai, and its owner can use it

either for actual construction or can sell it on the open market. Residential

development on slum land that is subject to the SRS also benefits from a superior

Floor Space Index (FSI) allowance which determines the total permitted construction

area as a portion of the total land area of a site. Under the SRS, the FSI is generally

around 2.5 as against a normal FSI of 1.33 thereby making SRS development more

attractive for developers. Moreover, the SRS can enable a developer to acquire land

in prime locations in Mumbai, a city where the scarcity of land is a constraint on real

estate development. The acquisition can be made at, in effect, lower cost (e.g., the

cost of constructing replacement housing for the slum dwellers) than traditional

purchases of land for cash, thereby reducing the asset cycle risk for the developer

between land acquisition and sale of developed property or FSI/TDRs. The innovative

subsidy mechanism of the SRS has spurred redevelopment activity in certain

deprived areas of Mumbai which were previously unattractive to real estate

developers. In addition to helping fulfill the social obligations of the government,

which does not have the resources to undertake rehabilitation projects on a large

scale, an on-going benefit of the SRS to the government of Mumbai includes the

addition of individuals to the tax rolls when they occupy new housing who, as slum

dwellers, were not previously part of the tax base.

COMMERCIAL REAL ESTATE

Commercial locations in India: Over the past five years, locations such as

Bangalore, Gurgaon, Hyderabad, Chennai, Kolkata and Pune have established

themselves as emerging business destinations that are competing with traditional

business destinations such as Mumbai and Delhi, especially with respect to their

commercial real estate sector. These emerging destinations have succeeded in

matching their human resources base with necessary skill sets, competitive business

environments, operating cost advantages and improved urban infrastructure. The

current relative position of the urban growth centers in India can be summarized

either as (i) mature, (ii) in transition, (iii) emerging, or (iv) tier III destinations.

These classifications are described below:

Mature Destinations: Locations such as Mumbai and Delhi have a metropolitan

character and have consistently been traditional business destinations with a

favorable record in attracting investment opportunities. However, factors such as

increasing operating costs and constraints on the availability of land may impede

such areas from sustaining a high rate of growth in their respective business

districts. Therefore, commercial real estate growth is expected to be focused in the

suburbs and other peripheral locations of these cities. For example, with respect to

Mumbai, commercial real estate growth is expected to be focused in areas north of

central Mumbai and Navi Mumbai and to the east of the city center.

Destinations in Transition: Locations such as Bangalore and Gurgaon have human

resource potential, quality real estate and operating cost advantages. As such, these

locations are best positioned to attract investment in the near future. Lack of

infrastructure is currently the main inhibiting factor precluding robust growth in

these areas.

Emerging Destinations: Locations such as Pune, Chennai, Hyderabad and Kolkata

offer cost advantages, well developed infrastructure, supportive city governments

and minimal restraints on the supply of real estate. While the number of large

occupiers in these locations has yet to reach optimum levels, these locations attract

a large amount of real estate investment. Growth in these emerging destinations is

predominantly led by the expansion and consolidation plans of corporations in the IT

and ITES sectors.

Tier III Cities: Locations such as Jaipur, Coimbatore, Ahmedabad, and Lucknow

have a large talent pool combined with low cost real estate. As such, businesses in

the technology sector have demonstrated a growing interest in these locations as

they seek to expand their operations.

The Retail Segment:

While real estate development in the retail sector is a relatively new phenomenon in

India, the retail sector has been growing rapidly. A.T. Kearney‟s 2005 Global Retail

Development Index suggests that the Indian retail market has the largest growth

potential of worldwide retail markets. The following factors contribute to the

emergence and growth of the organized retail segment in India:

Increase in per capita income and household consumption;

Changing demographics and improved standards of living;

Changing consumption patterns and access to low-cost consumer credit

Infrastructure improvements and increased availability of retail space.

Historically, the Indian retail sector has been dominated by small independent local

retailers such as traditional neighborhood grocery stores. However, during the

1990s, organized retail outlets gained increased acceptance due to changing

demographic factors such as an increase in the number of women working, changes

in the perception of branded products, the entry of international retailers into the

market and the growing number of retail malls. The size of the organized retail

segment is expected to grow by 25% to 30% per year, reaching approximately Rs.

1,095 billion of sales in 2010. Although operators in the organized retail segment

have concentrated on larger cities, retailers also have announced expansion plans

into towns and rural areas. Major Indian business groups such as Reliance, Bennett &

Coleman, Hindustan Lever, Hero Group and Bharti as well as international retailers

such as Metro, Shoprite, Lifestyle and Dairy Farm International Wal-Mart, Carrefour

and Tesco have already commenced or are considering commencing operations in

India. There are 219 operational shopping malls in the six largest cities of India,

spread over 66 million square feet of land at an average size of 0.3 million square

feet per mall (CRIS INFAC Annual Review on Retailing Industry – September 2005).

A significant number of specialized malls, such as automobile, jewellery, furniture

and electronic malls also are being developed.

The Hospitality Segment:

The hospitality industry in India is witnessing robust growth, supported by India‟s

growing economy as well as increased business travel and tourism. The cost of travel

has decreased following the Government‟s liberalization of the airline industry in the

1990s. Also, the increase in disposable income among Indian workers has increased

demand for quality hotels and resorts across the country. According to the World

Travel and Tourism Council (“WTTC”), India‟s travel and tourism sector is expected

to grow 8% per annum, in real terms, between 2007 and 2016. The travel and

tourism sector is expected to contribute 1.7% of total GDP (US$ 29.6 bn) by 2016.

According to CRIS INFAC room demand will grow at a CAGR of 10% over the next

five years (CRIS INFAC Hotels Annual Review, July 2006). This is expected to be

accompanied by increases in average room rates of 20% and 10% in fiscal 2007 and

2008, respectively. It is expected that the growth in occupancy rates will be

assisted by factors such as 10% CAGR in the number of incoming travelers to India

over the next five years. The following chart shows changes in room demand and

availability as well as occupation rates since fiscal 2000 and projections through to

fiscal 2010:

According to its publication “Hotels Annual Review (July 2006),” CRIS INFAC

estimates that investments in the hotel industry will total approximately Rs. 90

billion over the next five years.

Special Economic Zones (“SEZ”):

The Government introduced SEZs in 2000 to provide an internationally competitive

environment for exports free of bureaucratic barriers. SEZs are specifically

designated duty-free zones deemed to be foreign territories for purposes of Indian

customs controls, duties and tariffs. The introduction of SEZs is aimed at attracting

foreign investment and increasing exports in order to promote economic

development and employment. There are three main types of SEZs: integrated SEZs,

which may consist of a number of industries; services SEZs, which may operate

across a range of defined services; and sector-specific SEZs, which focus on one

particular industry. Minimum sizes for SEZs are 2,500 acres for a multi-product SEZ,

250 acres for a sector-specific SEZ, and 25 acres for SEZs in certain specific

industries, such as biotech, IT services, gems, and jewellery. Under current

legislation, SEZ developers and tenants are granted various income tax benefits,

which are expected to attract software companies in particular, given that certain tax

breaks in existing software technology parks expire in 2009.

Entertainment:

India‟s entertainment industry is currently estimated at approximately Rs. 234 billion

with cinema accounting for a significant amount (28%) of the industry (The Indian

Entertainment and Media Industry (FICCI – PwC Report (2006)). While the

entertainment industry is expected to grow approximately 21% annually and reach

approximately Rs. 617 billion by 2010, the Indian cinema industry is expected to

reach approximately Rs. 153 billion in 2010, contributing approximately 25% to

India‟s entertainment industry. The key economic advantages of multiplex cinemas

over single-screen cinemas include better occupancy ratios and the ability for cinema

operators to choose to show movies in a larger or a smaller theatre based on

expected audience size. Multiplex cinema operators are therefore able to maintain

higher capacity utilization compared to single-screen cinemas and can provide a

greater number of film showings. As each movie has a different screening duration, a

multiplex cinema operator has the flexibility to decide on the screening schedule so

as to maximize the number of shows in the multiplexes, thus generating a greater

number of patrons. Multiplexes also allow for better exploitation of the revenue

potential of the movie. The key drivers of growth responsible for the expected

increase in the number of multiplex cinemas include an increase in disposable

income across an expanding Indian middle class, favorable demographic changes,

strong growth in organized retail and the availability of entertainment tax benefits

for multiplex cinema developers.

RECENT REFORMS IN THE INDIAN REAL ESTATE SECTOR

Foreign direct investment in real estate: In 2005, the government modified the

foreign direct investment (FDI) rules applicable to the real estate sector by

permitting 100% FDI with respect to certain real estate projects such as townships,

housing, built-up infrastructure and construction development projects, subject to a

number of guidelines. The new FDI rules mainly relate to the minimum area required

to be developed by such a project, minimum amounts to be invested and time limits

within which such a project must be completed.

Housing regulations: The Indian Government enacted the Urban Land (Ceiling and

Regulation) Act (“ULCRA”) in 1976 to prevent speculation and profiteering in land

and to ensure equitable distribution of land in urban areas in order to serve the

common good. Pursuant to ULCRA, urban cities were classified into A, B and C

categories. The act imposed a ceiling on the amount of vacant land that any

individual can possess in a particular urban area, based on the classification of the

city in question. In „A‟ class cities, such as Delhi and Mumbai, this amounts to no

more than 500 square meters. The excess land identified was acquired by the

government after compensating the owners thereof and used to provide housing to

various sections of the public. However, it is widely acknowledged that ULCRA has

failed to achieve its objective and has resulted in inflated prices and exacerbated

housing shortages. The Government therefore suggested the repeal of ULCA by way

of the Urban Land (Ceiling and Regulation) Repeal Act 1999 (“Repeal Act”), which

has so far been adopted by the state governments of Haryana, Punjab, Uttar

Pradesh, Gujarat, Karnataka, Madhya Pradesh, Rajasthan and Orissa, but has not

been repealed in a number of states, including Maharastra where Mumbai is located.

CHALLENGES FACING THE INDIAN REAL ESTATE SECTOR

Highly regional reach of existing players: Considering the peculiar features of

the real estate sector such as the differing tastes of population across various

geographies, difficulties in mass land acquisition on unfamiliar terrain, absence of

business infrastructure to market projects at new locations, wide number of

approvals to be obtained from different authorities at various stages of construction

under the local laws, and the long gestation period of projects, most real estate

developers in India tend to hover in tried and tested areas where the conditions are

most familiar to them. As a result, currently there are very few players in the

country, who can claim to have pan-national area of operations.

Majority of market belonging to unorganized segment: The Indian Real Estate

Sector is highly fragmented with the disorganized segment comprising of the small

builders and contractors accounting for a majority of the housing units constructed.

As a result, there is a lesser degree of transparency in dealings or sharing of data

across players.

Demand dependent on many factors: A challenge that the real estate developers

face is generating the requisite demand for the properties constructed. The factors

that influence a customer‟s choice in property is not restricted to quality alone, but is

dependent on a number of other external factors including proximity to urban areas,

amenities such as schools, roads, water supply which are often beyond the

developer‟s sphere of reach. Also, demand for housing units is also influenced by

policy decisions relating to housing incentives.

Increasing Raw Material Prices: Construction activities are often funded by the

client who makes cash advances at different stages of construction. In other words,

the final amount of revenue from a project is pre-determined and the realization of

this revenue is scattered across the period of construction. A big challenge that real

estate developers face is dealing with adverse movements in costs. The real estate

sector is dependent on a number of components such as cement, steel, bricks, wood,

sand, gravel and paints. As the revenues from sale of units are pre-decided, adverse

price changes in any of the raw materials directly affect the bottom lines of the

developers.

Interest Rates: One of the main drivers of the growth in demand for housing units

is the availability of finance at cheap rates. Rising interest rates may dampen the

growth rate of demand for housing units.

Tax incentives: Interest payment on housing loans are tax deductible and it is one

of the major factors influencing demand. The phasing out available tax incentives

could affect the existent demand for housing units.