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Stock market potential largely untapped

By: property vertical, Fri Jul 21st, 2006 09:38:25 AM

Even as the Indian real estate sector is towering new heights, its capital market growth potential has remained largely untapped so far.

The public equity stake in the industry stands at a dismally low level of 0.2 per cent, while more than 98 per cent of the overall Indian commercial property market remains in the owners’ hands, global equity research major Deutsche Bank said in a special report on Indian real estate market.

A majority of the overall stock market presence of the real estate sector in India, as estimated by the Deutsche Bank study, is privately held, while the publicly traded component of the industry is still in its nascent stage with a market share of less than 0.5 per cent.

For the investors’ willing to invest in the sector, options are limited to only a handful of listed companies.Even among the publicly traded real estate companies, promoters hold the majority of the stake.

The situation is likely to improve once DLF Universal, a leading player in the market, enters the capital market. The company is planning to raise more than Rs 12,000 crore through its public issue, which is likely to be the biggest ever initial public offer (IPO) in the country’s capital market.

According to the data available with stock exchanges, a staggering 65.27 per cent stake is held by promoters in Ansal Properties and Infrastructure Ltd, a major real estate player in the country.

A similar pattern is seen in the shareholding chart of Unitech Ltd, which has seen a sharp rally in its share price over the past few months. The promoters hold a huge 60.28 per cent stake in the company.

With the absence of Real Estate Investment Trusts (REITs) and Real Estate Mutual Funds (REMFs) the real estate investor doesn’t have too many choices.

The introduction of REITs and REMFs is expected to provide investors with a comfort zone, while improving transparency and reducing liquidity risks. This will also provide a wider choice range for investors to invest in the sector, the report said.

The Security Exchange Board of India had approved the Real Estate Fund (REF) in 2005, but this is presently open only to high net-worth individuals (HNIs), institutional investors and global investors.

Deutsche Bank expects the country’s growing economy to lead to significant boost in demand for retail, office and logistics space, which will eventually drive further growth in the commercial real estate sector.

A strong capital market base would augur well for property financing, while introduction of REITs would provide global investors a familiar investment vehicle, the report added.

Currently, private investors are playing an important role in the country’s real estate investment market. The total private equity volume stood at $1.6 billion, or 40 per cent of the Indian real estate capital market at the end of 2005, the report says. According to Deutsche Bank report, India’s institutional real estate market is also under-developed and the investible stock, the market component that is or could become an asset of institutional investors, is no more than $83 billion.

The investible stock accounts for only 27 per cent of the total market.

Deutsche Bank estimates the total commercial property market at over $300 billion, out of which the invested stock, the share owned by professional real estate investors, accounts for only $4 billion.

Deutsche Bank’s research report on real estate forecasts that the commercial stock has the potential to grow by $66 billion in the next five years to $366 billion

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