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India Real Estate Report Q3 2011
Business Monitor International, May 2011, Pages: 72
India is among the world’s fastest-growing economies, in large part because of huge growth in its services sector. Although the report expects economic growth to slow in FY11-12 (April-March), India's longer-term macroeconomic outlook remains one of the most favourable globally as a result of the country's strong demographics, economic liberalisation and reliance on domestic demand drivers. The information technology (IT) and information-technology-enabled services (ITES) sectors continue to lead growth.
The commercial property market is responding favourably to economic growth and corporate expansion plans, driven by the demand-supply equilibrium in different market sectors. Demand is increasing in line with India’s buoyant economic recovery. The balance between supply and demand of real estate in India varies between cities and sub-sectors to a greater extent than in other countries.
Demand for commercial property space has been growing at a sufficient rate in most of sub-sectors for new supply to be absorbed. Demand for commercial property space in India's seven largest cities will reach 14.9mn m2 by 2014. Demand is greatest in Mumbai, Bangalore and the National Capital Region (NCR). However, there has also been substantial development activity, especially in the NCR and Mumbai, leading to vast amounts of new supply.
The new Direct Tax Code (DTC) simplifies tax regulations, and has been expected to spur development in the Special Economic Zones (SEZs). However, in this year’s budget, the minimum alternate tax has been advanced by a year – from April 1 2012 – which will tend to restrain new SEZ developments. A number of real estate funds are beginning to invest or to increase their involvement in rental yield assets. Investment is shifting from development projects to commercial property that is already developed and rented.
Key Risks:
Among the emerging economies, India has been receiving one of the largest shares of Foreign Direct Investment (FDI). However, investment fell in 2008-2009. The reasons for the decline include: investors losing large amounts in the downturn in 2008, a slowing of demand in the residential sector, and the scandals involving corrupt practices in the real estate industry.
Poor infrastructure is one of the main challenges facing the business environment in India, and is a key challenge for the government. India will require approximately US$1,000bn of investment in infrastructure between 2012 and 2017. This represents twice the expenditure over the previous five years, according to India’s Planning Commission. This would allow India to keep pace with the development path of China.
The weak link in India's economic growth story remains its fiscal position. Populist spending measures, rose-tinted growth projections, and a lack of reform detail in the FY11/12 union budget underscore a belief that India's policymakers are growing complacent about the country's poor fiscal dynamics.
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