Construction Industry Output in USD Billion

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1 Infrastructure and Construction Sector Overview in India The Infrastructure / Construction sector, comprising of Real Estate (both Residential and Commercial) and Infrastructure (Roads, Highways, Airports, Ports and Railways) is understood to be the second largest employer in India, directly employing more than 40 Million people. Despite relatively slow growth years of 2011 and 2012, the Construction industry is all set to continue its high growth till 2016, on account of revised government emphasis on the sector, which combines ambitious targets with support in the form of funds, favourable credit terms and easing of FDI norms. Construction Industry Output in USD Billion Construction Industry Output in USD Billion Furthermore, as a percentage of GDP, the Construction sector has retained its healthy percentage of approximately 8% over the past 5 years. This is expected to continue in the upcoming years, which suggests that the sector is expected to maintain a healthy contribution to a rapidly growing Indian GDP. Page 1

2 Share of Constructi on in real GDP GDP Growth Rate Constructi on Industry Growth Rate % 8.0% 7.8% 7.9% 7.9% 7.8% N.A. N.A. N.A. 9.3% 6.7% 8.6% 9.3% 6.2% 5.0% 7.3% (e) 10.8 % 5.3% 6.7% 10.2 % 5.6% 4.3% 8.0% (e) 8.5% (e) 10.0 % (e) 9.0% (e) 11% (e) According to the estimates by Government of India and the Reserve Bank of India, the Construction sector output is expected to touch USD 90 Billion by the end of Calendar Year As per estimations by the various agencies of the Government of India, including the Planning Commission, which is responsible for developing the Five Year Plans, the Infrastructure subsector is set to outgrow the Residential and Non Residential subsector within the next few years, as can be seen from the chart below. Page 2

3 Percentage Breakdown of the Construction Industry Infrastructure 52% Residential and 48% Non Residential Percentage Breakdown of the Construction Industry % 52% Infrastructure Residential and Non Residential Investment Scenario: The charts below depict the investment scenario for the Construction sector, specific to investments made by Scheduled Commercial Banks and Foreign Direct Investment. Page 3

4 Years Gross Bank Credit (in USD Billion) Foreign Direct Investment (in USD Billion) Utility Infrastructure Airports The Civil Aviation sector in India has been growing rapidly since the turn of the century and all indicators point to explosive growth continuing in the next few years, till at least 2020, when conservative estimates suggest that passenger traffic in India will cross 450 Million (more than double the present number), comprising both domestic as well as international travellers. Projected growth in Air Passenger Traffic in India Passenger Traffic in Millions CAGR: 12.5% Passenger Traffic in Millions Page 4

5 Industry Speak The world is focused on Indian aviation from manufacturers, tourism boards, airlines, global businesses to individual travellers, shippers and businessmen If we can find common purpose among all stakeholders in Indian aviation, a bright future is at hand, Mr Tony Tyler, Director General and CEO of International Air Transport Association (IATA). Key Points: Over the next 8 10 years, the cities of New Delhi, Mumbai, Bangalore and Kolkata will execute work for a 2nd airport. In addition, the existing airports at Bangalore, Chennai, Kolkata, Ahmedabad, Pune, Patna, Jaipur, Guwahati and Lucknow will execute modernisation and expansion activities in the form of new terminals by In the same period, there will be 14 new 'Greenfield' airports being planned for in the states of Goa, Madhya Pradesh, Maharashtra, Karnataka, Kerala, Rajastha, Uttar Pradesh, Tamil Nadu, Sikkim, Nagaland and Arunachal Pradesh Page 5

6 Game Changers Privatizati on of Airports FDI in Civil Aviation Civil Aviation Ministry of India, along with the Airports Authority of India are working on finalizing plans to execute a privatization plan for upgrading and maintaining airports in India, which will allow private companies to own upto 74% equity in airports they manage. Till , the government estimates that an amount of approximately 7.8 Billion Euros will be required to develop, expand and modernize airport infrastructure in India. Out of this, about 75% will be contributed by the private sector. India has allowed FDI of upto 49% in its civil aviation sector and there are talks that in the upcoming years, in select spheres within the overall aviation sector, the FDI cap could be increased to as much as 74%. Already, foreign companies have started investing in the Civil Aviation space in India, by collaborating with Indian partners. The most notable example being tie ups between Spice Jet (India's second largest low cost carrier) and Singapore based Tiger Air as well as the launch of a new airline under the collaboration between Tata Sons and Malaysia based AirAsia. Container Facilities Railways: Indian Railways is the world s second largest employer with a workforce of more than 1.5 Million people. During Financial year , Indian Railways carried 1009 Million Tonnes of Freight Traffic and the same is expected to grow by about 4% to 5% every year for the next few years. Almost 70% of total earnings of Indian Railways come from Freight services. To cater to this demand, the planned investment till the end of Financial Year is more than USD 86 Billion, out of which, 19% is expected to be contributed from the private sector. Out of this, Page 6

7 approximately USD 6 Billion will go towards developing the Dedicated Freight Corridor project which is intended to decongest the routes between Delhi, Mumbai and Kolkata, by building dedicated cargo lines. In the recent years, the Government of India has allowed private players to build, develop and run rail connected freight terminals. Ports: With more than 7500 kilometres of coastline, India boasts of 13 Major Ports and more than 180 NonMajor ports, out of which only about 60 are operational right now. In Financial year , Indian ports handled close to 1 Billion MT of cargo. This is expected to grow at a CAGR of about 12% for the next few years. In addition, more than 40 port modernization and expansion projects are currently under implementation with an estimated cost of USD 2 Billion. Furthermore, containerization level of cargo at Indian ports is only about 25% as against the global average of 60% 70%. This, points towards an innate need for the Indian Ports to continue their modernization and expansion plans so as to be able to be ready for the significant growth in traffic expected within the next 3 5 years. Commercial Infrastructure 1. Shopping Malls The Mall culture in India has started showing real slowing signs over the past 2 years on account of an oversupply situation that was created in the preceding years. The total retail market size in India was projected to cross the USD 650 Billion mark by early 2016 (from approximately USD 400 in 2010). More than 90% of this growth was expected to come from Organized Retail and this fuelled tremendous growth in malls related investments. Page 7

8 The Bad News Between 2010 and 2013, 250 to 300 new m alls were were developed and launched in India. By the end of 2013, due to the 'OverSupply' condition of the m arket, nearly 60% of the newly created retail space rem ained vacant because of high rentals and unwillingness by retail outlets to take risks. As a result, within the sam e tim e fram e, it is estim ated that nearly 40 m alls had to shut shop due to lack of business. Disproportionate Distribution of Mall Space in India Expected Distribution of Mall Space in % 5% 5% 7% 27% 30% Delhi Mumbai Hyderabad Bangalore Pune Others As can be seen from the adjoining chart, the distribution of mall space in India is highly disproportionate with high concentration of malls in Delhi and Mumbai. By early 2013, the total mall space in India was approximately 75 million square feet, which is poised for a much slower growth in the next 2 3 years. Source: PWC Report on Indian Retail Sector; Assorted News Articles from Reuters and Business Standard In addition, the growing presence of the Online Retail and ECommerce industry in India, along with evolving buyer trends has significantly slowed down the projected growth of construction of new malls in India as developers are hesitant to invest in this highly capital intensive sector. Page 8

9 2. Office Space As of the beginning of 2012, there were 143 operational SEZs (Special Economic Zones) in India, essentially large demarcated areas of land developed specifically to provide impetus to select industry sectors with fiscal incentives and tax concessions. In addition, development and physical construction work has begun for an additional 381 SEZs whereas land has been identified and permissions granted for approximately 600 additional SEZs. It must also be noted that out of 143 operational SEZs in India right now, a significant majority of them (91) are located in the 4 states of South India. Although in the next few years, this imbalance will even out significantly, still, the Southern part of India is expected to remain a key driver of growth in the SEZ sector, especially in the sectors of IT/ITES, Hardware, Pharmaceutical and Manufacturing. The Commercial Office Space sector is currently in an OverSupply situation in India, with growth slowing down considerably over the past 2 years, due to a generally weakened macroeconomic environment which saw many new projects being delayed. Page 9

10 New Office Space Being Developed in Million Square Feet New Office Space Being Developed in Million Square Feet As can be clearly seen from the chart above, the rate at which new office space is being added in India has slowed down from the highs of 2010 and earlier. It is unlikely that past mistakes will be repeated and subsequent growth in new office space construction is expected to remain flat in the next 2 4 years until such time as demand catches up and vacancy rates (of above 20% in Mumbai and New Delhi) come down to below 10%. Another aspect about the overall Construction industry in India and in particular about the Commercial Office space segment is that over the past 2 3 years, there has been a steadily growing adoption of PreCast Concrete parts in the construction of large projects involving tall structures. This also includes using precast tiles and slabs for paving requirements in these projects for driveways, walkways, outdoor public areas, etc. Thus, the market in India is in a very favourable mindset now as regards use of precast concrete products because of their cost and time benefits compared to traditional Onsite construction processes. Regional Variations: Page 10

11 The one big difference in this above trend is the region of South India, where real estate developers are carrying on development of new office space and are major contributors to growth right now. It must be noted that global investment is also flowing towards real estate developers based in South India with investments worth close to USD 1.5 Billion being pumped into the market by players such as Qatar Sovereign Wealth Fund, Singapore Sovereign Wealth Fund, Blackstone Group LP and HDFC Property Ventures Ltd. Thus, South India will beat the national average in terms of new office space being developed over the next few years and therefore this region is likely to see greater demand for construction related allied products and services like paving stones and slabs. Residential Infrastructure It is estimated that India needs to develop more than 2 million houses every year from now till 2028, simply to cater to the housing shortage witnessed presently on account of the burgeoning population. However, almost 85% of these houses will for the economically weaker sections and low income group households. MidIncome: By the year 2026, it is estimated that middle class households may triple to almost 115 Million units. An average middle income house is about square feet in size. Most of these houses are being developed in residential suburbs of tier 1 cities and across most tier 2 cities in the form of large apartment complexes. Luxury: Furthermore, the Luxury housing segment is the fastest growing segment among all Residential sector segments. From 2008 to 2012, more than new units were launched in top 7 cities alone with a combined Page 11

12 value of just over USD 30 Billion. On an average, luxury housing segment in India refers to houses with a minimum of 1500 square feet in size with literally no upper cap. It is expected that India will require at least 1.5 million luxury houses within the next few years. Most of these highend luxury houses tend to be part of large gated communities with either independent villas and row houses or huge multi bedroom apartments and all modern living facilities such as supermarkets, schools, hospitals, etc. as part of the Integrated Township. Page 12