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What Are The Reasons Behind Low Global Capital Inflows In Indian Real Estate?
Out of more than USD 610 billion global capital inflows into the real estate market in 2016, Indian real estate got a meager amount of ~USD 6.6 billion, which is just 1% of total inflows. There are a number of reasons that make Indian real estate market unattractive and non-reliable even after having top projects. For instance, in the times when PE funds are more focused on quality of partners than IRR (Internal Rate of Return), due to highly disconcerted nature of the market, struggle of investors has increased more.
Only a few developers could get success in attracting private equity. This can be either due to limited time in the market or wrong business practices adopted by developers, they couldn’t attract PE. Just have a look at the table below and you will notice that there are a small number of developers having a presence in the market for over a decade. Most of the developers are new entrants who entered the market 2012 onwards.
Source – JLL Research
Reasons behind marginal share of the Global Capital Inflows
Lack of depth
After considering the huge number of 11,500 developers under the CREDAI (Confederation of Real Estate Developer’s Association of India) group, it was found that only 124 developers could successfully and consistently deliver their projects over a period of 11 years. This number includes delivery of projects across all three phases of residential real estate cycle in India. This makes just 1% and sharply exposes the lack of depth in the Indian real estate market.
Wrong business practices by developers
When it comes to marketing and promotion of the residential projects, many developers resort to wrong business practices. You can easily find property websites in India misguiding the home buyers and investors with fake information about the builder, their track record, and project completion status. It causes a wider trust deficit between the home buyers and developers.
Solutions to attract more inflow
To get more PE funds, developers need to focus more on the brand building than just increasing their ROI. This can be made possible only by setting up a full-fledged team of professionals who can manage investor relationship.
Increased transparency and integration in Indian real estate market can boost foreign investor participation like never before. It will not just help the builders attract more private equity but also the PE funds in getting high-quality and reliable investment options. It will gradually increase the share of the global capital inflows for India.
Favorably, the government has already started taking steps in this direction by announcing new policies and regulation for Indian real estate market, including:
• Real Estate Regulatory Act (RERA) that was passed in March 2016 to increase accountability and set disclosure norms in realty market
• Service tax exemption to boost construction of affordable housing through collaboration of the public and private sector
• Benami Transactions Amendment Act, 2016 to put a check on Benami transactions through regulatory mechanism for dispute handling
Fair game by listed players
Builders who are listed on stock exchange need to follow ethical business practices while trading in their own stock. Along with this, they also need to decide a fair compensation structure for directors and new policies to retain key management personnel.
Higher transparency and corporate governance due to new rules will boost chances of more positive property trends in India with increased inflow of private equity funds.
*The three phases, Indian real estate sector has gone through
1. Rapid growth witnessed from 2005 to 2008
2. The post-GFC (Global Financial Crisis) period from 2009 to 2011
3. Present phase of stagnant growth started from the year 2012