Real Estate Development in India
Updated: Sep 13, 2019
In India, the real estate sector is the second largest next to agriculture in terms of employment generation and substantially contributes to the GDP of the Indian economy. There is a significant growth in housing and allied segments such as retail, hospitality and commercial real estate and is contributing almost 5% of the country’s GDP. Furthermore, these activities of the real estate are associated with the industries such as cement, steel, paints, brick, timber, building materials and so on which enables an increase in a household income of the families. With such an increase in income, expenditure also increases, which then helps to build a strong multi-fold economy. Besides, due to a large population of India, the impact of the real estate sector is significant on the Indian economy (Annamalai, Doshi, 2012).
Because of the social structure of the Indian society, which is diverse, property markets in India are significantly different from those of the global markets. The fundamental factors such as GDP growth, exports, FDI, urban growth, population growth, income growth, increase in disposable incomes, resulting in improved demand and market segmentation. However, the Indian market is underdeveloped with issues such as low transparency, corruption, bureaucracy and governance. Thus, decision-making processes and investment strategies for real estate business are flexible. India is now entering a new phase of development with the change in FDI regulations which will further enable improvement in existing infrastructure and can be stronger, deeper and more diversified growth in the real estate industry (Lynn, 2010).
At the local level, real estate business has complex governance with a set of regulations based on socio-economic factors that vary across different countries. In India, as real estate is considered as a business and is not particularly dependant on demand and supply, it does not follow the benchmark model. However, due to significant investments needed in the real estate development sector, there are international collaborations in the industry by default which follow internationally accepted processes and spills into a particular network of such Indian real estate developers. The red tape effect to a certain extent does make things difficult both for the buyers and the developers but due to the prolific demand of the Indian market; residential projects are sold out much before the commencement of the project on-site (Das et al., 2013).
The complex nature of the real estate development process, which is capital intensive and risk-prone nature of the real estate development requires careful planning. It involves multiple steps and stages with different actors such as engineers, architects, investors and consultants playing different roles in the process to produce an overall output. These processes are flexible depending upon the market conditions and are taken earlier and other concurrently with others. The developer decides selection and sequencing of the steps which are relevant and essential at that particular time. According to a theoretical perspective, there is a gap in the knowledge in decision making and the theory itself (Annamalai, Doshi, 2012).
Financing real estate projects in India is a complicated process. The banks, financing institutions which are regulated by the Reserve Bank of India (RBI) are very cautious in lending to real estate developers due to uncertainty and risk-oriented, nature of business. Most of the banks give loans to the home buyer rather than a developer who is more secure for the banks. The loans given to the developer are only for the construction stages of the development process. These loans are disbursed only after securing all the necessary approvals from the local authorities. These things do happen only when the land is acquired, for which banks do not fund and is most capital intensive within all the stages of the project development (Annamalai, Doshi, 2012).
At the local level, there are different processes involved in real estate development and the first and the foremost is acquiring a large portion of land (which is scarce in India) by the developer known as a land bank. The land which is purchased by the developer acts as equity investment which may also act as collateral to loans. The loans acquired from the banks by the developer for the construction process and the initial sale before the execution of the project enables the developer for the second stage, i.e. project planning. The third stage involves necessary approvals from the planning authorities and the financing of the project, which is then followed by the fourth stage of marketing and pricing of the project. Finally, the last stage involves sale and construction of the project which happens phase-wise unlike the benchmark model where sale and construction activities are segregated for transparency between buyer and the seller (Das et al., 2013).
To summaries, the above literature review, the basis for a strategic approach in making real estate deals depend on strategic influences and transactions that are identified by the real estate business framework. These strategic influences and transactions then become the driving forces within the real estate functioning processes. These forces apply to all those sectors who are interdependent on the real estate business and act cohesively to form a system (Roulac, 1996). Such a system in a real estate business with a wide range of choices is flexible in terms of prioritising and implementation. Each property in a real estate business is unique, and so are the transactions that take place within the system. However, there are certain common elements or patterns identified in the real estate processes and are as per set standards to some extent with common development strategies. By understanding such patterns of deal-making in real estate processes can be further enhanced by understanding the linkages and can be very useful in the decision-making process. The main objective of real estate business thus is achieved with flexible but a systematic approach (Roulac, 1996).
Annamalai, T., & Doshi, M. (2012). Beyond Capital: Private Equity and Real Estate Development in India. The Journal of Private Equity, 15(3), 62-76. Retrieved from http://www.jstor.org.library.britishcouncil.org.in:2048/stable/44954004
Das, P., Sah, V., Sharma, D., Singh, V., & Galuppo, L. (2013). Real Estate Development Process in India. Journal of Real Estate Literature, 21(2), 271-292. Retrieved from http://www.jstor.org.library.britishcouncil.org.in:2048/stable/24885053
Lynn, D. J. (2010). Emerging market real estate investment: Investing in china, india, and brazil. Retrieved from https://ebookcentral-proquest-com.library.britishcouncil.org.in:4443
Roulac, S. (1996). The Strategic Real Estate Framework: Processes, Linkages, Decisions. The Journal of Real Estate Research, 12(3), 323-346. Retrieved from http://www.jstor.org.library.britishcouncil.org.in:2048/stable/24885743