FDI inflow to real estate lowest in 4 years

Foreign direct investment (FDI) in the real-estate sector last year was the lowest in four years, but private equity activity gained momentum during the recent months, according to a study by an Indian industry chamber and a global accountancy firm.

Between January and June 2011, PE investments in real estate reached $444 million, 47 per cent higher than the investments made in 2010 during the same period. And, most of the investments are coming from realty-focused funds, says a joint report brought out by Ficci and Ernst & Young.

Luxury housing, it notes, has taken a backseat and affordable housing is gaining momentum due to the liquidity tightening by the RBI. between March 2009 and November 2010, developers sold more than 40 million sq ft of mid-income residential property in the National Capital Region alone. “On the residential front,” notes Rajiv Kumar, secretary-general of Delhi-based Ficci, “the sector will face significant shortage of homes for the mid-income group. This has become a priority for the government.”

Property price was to climb further on the back of rising raw material cost, labour shortage and rising interest cost, which is putting pressure on the profit margins of the developers, the report said. The latter increase would not only increase the monthly payment, but also increase the cost of construction, ultimately impacting the selling price of apartments. The industry is grappling with a labour shortage of about 30 per cent. The situation is expected to worsen in the next decade when demand is expected to rise three-fold. “Real estate prices have peaked, exceeding the pre-recession rates in some markets,” says Ajit Krishnan, partner & real estate & infrastructure leader of London-headquartered Ernst & Young, which has member firms in more than 140 countries.

The report has added that possible FDI in multi-brand retail would lead to increase in rentals. While consumer spending has increased, rentals continue to remain under pressure due to excessive supply. Bengaluru is set to witness increase in rental due to lowest vacancy rate and over-supply, while Noida may not experience an increase in rentals due to high vacancy rates. As per the report, Mumbai and Delhi are the undisputed leaders in all forms of real estate, but due to scarcity of land, rising rentals and capital value, developers and industries are targeting Kolkata, Pune and even tier II cities such as Mysore, Chandigarh and Jaipur.

To make malls attractive amid an oversupply market, luxury and theme-based outlets are increasingly gaining momentum.