REALTY DAWNS

DLF LTD

The firm's successful issue and listing on the exchanges is a sign of the growing importance of the country's real estate sector.

From a $12 billion sector in 2004-05 to a $ 50 billion space by 2010. That's the kind of distance the real estate sector is expected to cover in the next few years. And with the successful completion of the DLF equity issue, the sector has taken a big stride.

The Gurgaon-based realtor mopped up $ 2 billion plus (Rs 9187.5 crore)and post listing its market capitalisation is nudging Rs 100,000 crore. With this, the dozen or so established firm command a total market capitalisation of around Rs 1,70,000 crore. This may work out to just under 4 per cent of India's total market capitalisation, but it won't be long before real estate plays a far bigger role both in the in the market and also the economy. "It could soon become a bell-wether sector like in western markets," says Abheek Barua, chief economist, HDFC Bank.

That's because of the huge demand for developed property. Currently, penetration in both the housing and commercial space segments remains low. The Planning Commission places the current shortage at close to 22 million dwelling units while McKinsey and NCAER put the requirement for developed space at four-six billion square feet by 2015.

The demand is being driven by a younger population with higher disposable incomes, a relocation of people from rural to urban and semi-urban centres. Also ownership costs relative to incomes have fallen "" traditionally home prices were 30-40 times the average annual income, today they are about a tenth of that.

It's the huge potential for growth, according to Barua, that is pulling in so much foreign money. Says Barua,"Much like in other countries like China, this sector too will attract large amounts of capital whether it's from Private Equity(P/E) players, via the foreign direct investment route or from the capital market.

And what will help real estate firms attract funds is the increasing corporatisation of the space. Says V.Vaidyanathan, executive director, ICICI Bank, "With firms being listed on the bourses, there will be more disclosures greater transparency, accountability and corporate governance.

According to Sanjay Dutt, deputy managing director,Cushman & Wakefield, about $15-$18 billion is estimated to have been committed to projects, with the government easing the FDI norms in March 2005. Blackstone, Morgan Stanley and Emaar are among the foreign players are believed to have made investments.

This money, Dutt believes, has really come in handy because , with interest rates on the rise and banks reluctant to lend thanks to strictures by the central bank, developers have been strapped for funds. But what will really help the sector is a strong secondary market as it exists abroad. Observes Jai Mavani, executive director, KPMG,"The market needs to develop so that players like pension funds, endowment funds and insurance companies invest in property, like they do overseas."

Mavani adds that funds typically allot as much as 20-30 per cent of their corpuses for investing in real estate and earn yields of between 7-8 per cent. But it will take years for a secondary market to develop. In fact, it will not take off unless stamp duties are reduced. Says Vaidyanathan, "Changes in the tax structure, for instance a reduction in the capital gains tax will encourage people to sell earlier than they do now. The number of transactions will go up and the rates at which these happen will also be more 'real'."

As HDFC Bank's Barua points out, the housing sector tends to overheat quickly, essentially because it is one of the shallowest of markets.

" Unlike in the stock market where there are derivatives to help manage risk, the action in the case of housing plays out in the spot market causing it to overheat quickly," he says. Cautions Mavani," It's important that the firms that raise money achieve the projections they have made. If they are not able to deliver,it will impact the market." True enough. More than anything else, developers need to build credibility.