History of Indian Real Estate

Published on: 22 September 2014


In the last decade, particularly post 2004, when mall culture started to flourish in India, the real estate sector has undergone a big transformation owing to IndiaÔÇÖs growth momentum. Initially, malls mainly concentrated on metro and other major connected cities. This scenario is fast changing, with global and local brands competing on the same platform.

Apart from malls, the major change that has affected real estate markets across India is improving infrastructure. Be it growing rail network, metro trains, airports, flyovers, or new national highways, improved connectivity across India with metro and neighboring cities, villages, and states have made a big difference. This new infrastructureis generally surrounded by SEZs and business hubs, constructed around these areas. Residences and commercial places have started growing around the same infrastructure and/or malls.

The phenomenal development of infrastructure, malls, and commercial hubs has helped residential real estate boom in those areas. The cycle started big growth driven mainly by the real estate boom since 2004-05 in India. The major Indians cities ÔÇô Greater Mumbai, Delhi, Bangalore, Noida, Pune, Gurgaon, Chennai, and Hyderabad have displayed humongous growth in the real estate sector.

The real estate sector boom always has positive effects on other connected sectors such as cement, construction, furniture, auto, and electronics. The same phenomenon was seen during 2004-2008 in India prior to the global slowdown. This real estate story has helped India post higher GDP numbers consistently over the years.

Post 2008, with the credit crisis, global slowdown, and recession in many countries looming large, the thing to note was that India got marginally affected.

Here we have plotted some pointers with respect to the Indian economy along with real estate sector from the pre-2008 era to until 2014 and beyond…

Pre-2008

Positive Investment Environment

  • High FDI and FII flows
  • Average GDP growth above 8% in 5 years
  • Service sector growth was around 11%
  • Industrial sector growth was at 8%

Optimism in real estate sector

  • FDI in the real estate industry increased more than three times
  • Service sector improvement led tomore demand for real estate
  • Higher salaries and business income movedmore investments in real estate

During 2008-2009

Global financial crisis leading to negative sentiments

  • GDP growth rate dropped way below 7%
  • Credit crisis followed byincreased bankruptcy filings in the US
  • Withdrawal of foreign funds from Indian equity markets
  • Service and industrial sector growth rate dropped heavily

Pessimistic attitude of investors

  • FDI in the real estate industry decreased significantly
  • Decline in the service sector growth caused decrease in real estate demand
  • Real estate inventory led to correction in realty prices

During 2010-2013

More pain for the Indian economy

  • GDP growth rate dropped way below 5%
  • Government’s non-functioning led to lower the confidence of the FIIs in India

Real estate markets

  • Post correction in equity markets, investors moved towards real estate, which led to some recovery in real estate market to gain pre-2008 valuations
  • By 2012,real estate markets moved up considerably higher compared with the 2009 lows, mainly in metro and major cities of India

2014

Better days, going forward

  • The BJP-led new government brought improved sentiments in the country and its improving with every passing month
  • Equity markets conquered new highs everyday proving their importance as an asset class, and most research agencies expect them to remain buoyant in the next few years
  • GDP growth rate is likely to move to 6% in 1 to 2 years as per estimates from some renowned research agencies
  • With rating agencies such as Moody giving an indication on re-rating the India story, more funds could flow into India in the next few years

Game-changing economic reforms to boostinvestments

  • The new government looks more favorable towards improving the infrastructure and real estate sectors
  • Lowering inflation might help RBI to apply brakes on further rise in interest rates. At some point of time, they might think about reversal of the interest rate policy
  • This would help the real estate industry on the liquidity front

Although we have seen a few bad days in the real estate sector from 2008 to 2009, one has to remember that this was for a brief period during which the real estate sector got into troubled waters. The Indian real estate sector continues to deliver above average returns in the long term and is expected to become the favorite story of global investors in times to come.

Happy investing…

Manish Tawde
Financial Planning & Product Research

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