The real
estate sector plays a significant role in India's economy. Almost 5% of the
country's gross domestic product (GDP) is contributed by the housing sector.
Real estate in India has been characterized by an increasing presence of a
large number of public companies, along with the opening up of this sector to
foreign direct investment (FDI) and private equity firms. This has increased
the discipline and accountability of businesses houses undertaking large-scale
real estate developments. Indians have an innate propensity to own homes. This,
with rising income levels following India's rapid growth, has resulted in a
phenomenal increase in the demand for homes.
The country
has started viewing property as a preferred investment option, given that
returns are pegged between 11 % and 15%, compared with bank deposits, which
seldom offer returns over 10% a year. Prices of homes, therefore, have
increased at a steady pace in the past decade.
According to
Dun and Bradstreet Corp.,a provider of credit information on businesses and
corporations, the total value of real estate development in India was estimated
to be around Rs.67,480/- crores, growing at an annual pace of 30%. This growth
is fuelled by the growth in realty development in organized retail, followed by
housing and information technology and information technology-enabled services.
In recent
times, real estate has been seeing a plunge in demand with retail shying away
from exorbitantly priced spaces or paying high rentals. Reduced consumer
spending has also translated into a retail slowdown. Many firms have also
decided to relocate from high to lower cost locations, leading to vacancies
going up in retail and office space.
Interestingly,
a careful look at the performance of the sector reveals that the pace of
activity has been shifting to smaller cities. Several reasons could cause this
shift. First, speculative investments in real estate, which have been largely
confined to the metros, resulted in greater price volatility in these cities.
Secondly,
the high price of real estate in large cities has caused a number of offshore
companies setting up operations in India to expand into smaller cities,
resulting in a substantial increase in demand.
Thirdly,
builders and developers have mainly focused on high-end housing projects in
large cities. The recent economic slowdown has meant large stock of unsold
inventory. They have, therefore, shifted focus on developing projects aimed at
medium-income, middle-class households. Lastly, the special economic zone
policy has also resulted in a shift of activity from large to smaller cities.
So, where
are we heading? The advent of the private sector in real estate and the
government's proposal to offer fiscal concessions and creating an enabling
environment for housing development have led to rapid growth in private
investment in housing, with the emergence of developers mainly in metropolitan
centers and other fast-growing towns.
The growth
has been fuelled by rising business opportunities in new and emerging
enterprises, increasing income levels, low interest rates, employment
generation and demographic changes.
The real
estate market has also been boosted by a proposal to permit 100% FDI in the
sector. Also, a significant factor that drove the growth of the housing market
was easy availability of bank finance at affordable interest rates.
Finally, it
is important for policymakers to be vigilant and track the pace and economics
driving the evolution of the sector. There should be adequate supervision to
prevent reckless credit growth to fund its expansion.
India's
favorable demography, low mortgage penetration, falling interest rates and
ongoing infrastructure demand will keep the retail real estate downturn from being
protracted. The fundamentals of the sector are good and its growth should
continue in the foreseeable future.
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