In the new era of globalisation, knowledge and investment jointly drive the Indian economy. India?s 300-million strong middle class is emerging fast and prosperously enough to buoy the real estate market for a long time to come, as housing becomes a critical component of lifestyle aspirations. In such large numbers, this is a very recent phenomenon. Can public infrastructure keep up? The government has launched an infrastructure fund as part of a larger plan that envisages over $300 billion going into this vital sector.
Development of infrastructure is directly related to the build up of confidence in the real estate business. According to estimates of the Planning Commission, about 20 million new housing units will be required in just the next five years alone. Urban families are going nuclear, and a huge population ?bulge? will soon be in the ?nest making? age-group. No wonder analysts expect the real estate market to grow to over $50 billion by 2010, while demand for commercial space for organised retail touches 200 million sq ft that year.
The retail revolution is a significant factor, as shopping formats change rapidly. According to Jones Lang La Salle Meghraj, Mumbai and Delhi will account for 40% of India?s retail space by 2008. Meanwhile, the industrial corridor between Delhi and Mumbai is likely to generate industrial and construction activity in other towns and cities as connectivity improves and the infrastructure deficit narrows. Much attention is focused on innovative projects in the national capital region (NCR), which is set to continue Delhi?s tradition of being India?s entry-point?this time, for foreign investors. Gurgaon is bustling. The Noida authority is inviting MNCs and corporates to invest there, even as plans for the Taj expressway and a new airport get underway. Yet, there is talk in the air of a real estate ?bubble?.
A research report by Knight Frank, a consultancy, expects the pressure on residential value across the country to force a market price correction. Barring a reversal of current economic trends, however, the anticipated correction may have only sparse effects. In any case, large sums of money are looking to buy the dips.
The impact of global funds is expected to continue, though investment perspectives are diversified. Chandigarh, Bangalore, Kolkata, Hyderabad, Ahmedabad, Mysore, Pune, Dehradun, Kochi and Jaipur are the current hot spots for investment. Hyderabad and Bangalore continue their IT/ITeS run. The retail sector in Bangalore is growing at an annual rate of 45%. Visionary expansion is going on in Pune, as its reputation grows in corporate circles (Forbes has rated the city highly for business).
As far as the economics of the business goes, several large players have a huge advantage in having created vast land banks in advance of the boom. The leader, DLF, has 10,255 acres and has completed 224 projects. Unitech has 10,332 acres. Omaxe, Mahindra Gesco, Sobha Developers and Parsvnath are other big investors in this field.
The outlook now could depend on FDI inflows. The period from January to October 2006 witnessed a phenomenon of proportions that left all observers rubbing their eyes in amazement. FDI in the sector skyrocketed to $703 million in this boom phase, up from $135 million in the entire year of 2005, when the market sprang to action. The real estate story is far from done. This year, the share of FDI in overall real estate investment in India is expected to go up to 26%, compared to 16% in 2005-06. With Wall Street powerhouses Blackstone and Goldman Sachs expected to invest $1 billion each in this sector, the future is looking ever more alluring. Speaking very broadly, robust economic growth spells an annual return of around 20% on real estate investments. If paperwork and levies are eased, realty could outperform several other fancied asset classes. Selection of properties must be done with real discernment. Some do go down, if slowly, over time. But there are winners to pick.
?The author is with Krishna Securities. These are his personal views