Real Estate Still a Good Investment Option

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 housing alone and an unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times the increase in expenditure. 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 $14 billion (Rs67,480 crore), 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.

While such statistics are praiseworthy, it is also relevant to remember that the ongoing slowdown had started with a bursting of a bubble in US real estate, driven by reckless demand and supply conditions. 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 undertaking large-scale real estate developments. On demand, 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.

Moreover, 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. 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 headed? 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 centres 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 favourable 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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