Indian Real Estate Sector

I published an article on Indian Real Estate couple of months back in a leading magazine. Two days back, I revisited this article and decided to start a blog on Indian real estate sector - What it was, where it is now and where will it go from here. A small piece of the entire article is here:

India Real Estate
The size in terms of total economic value of real estate development activity of the Indian real estate market is currently US$40-45bn (5-6% of GDP) of which residential forms the major chunk with 90-95% of the market, commercial segment is distant second with 4-5% of the market and organized retail with 1% of the market. Over next five years, Indian real estate market is expected to grow at a CAGR of 20%, driven by 18-19% growth in residential real estate, 55-60% in retail real estate, and 20-22% in commercial real estate.

Long-term outlook
Long term industry outlook remains attractive: We believe that long term industry outlook remains attractive, on account of increasing urbanization, growing nuclear families and the increasing number of Indian middle class. Fundamentally, strong GDP growth, increasing tourism traffic and increase in per capita income coupled with lower interest rates shall improve the outlook of the sector in the medium to long term.

Key Drivers of Real Estate
1) Economic Growth
- GDP growth rate of ~8-8.5%
- Double-digit income growth rate for the next 3-4 years
- Income growth should improve affordability, driving demand for residential units
- Lower interest rates

2) Demographics and Urbanization
- Positive demographic trends - middle class or the aspirers to show a CAGR of 10.4% to reach 124m in 2013 compared to 46m in 2003
- Urbanization – UNDP forecasts urban population will constitute about 40% of total population by 2030 from the current about 28%
- Indian household families moving from joint families to nuclear families

3) Favorable Interest Rate and Fiscal Incentive
- Housing loan interest rate, despite the recent rise, continue to remain low compared to 15-16% in the 1990s
- Easy availability of finance
- Fiscal incentives offered on owing a residential house is also a significant demand driver

4) IT/ITES Growth
- Strong IT/ITES growth should drive demand for commercial space – FY07-10 CAGR of 23% as a result of 568 000 employee additions; Indirect contribution to residential demand as well
- They consume about 75% of the commercial space

5) Organized Retail and Hospitality Demand
- Organized retail penetration level at 4.1% is lowest compared to other emerging markets
- Economic growth and changing demographics should increase retail penetration levels
- Strong tourist arrivals should spur demand for hotels across India. Foreign Tourist inflow is forecasted to show a 20%+ CAGR to reach 10m by 2010 compared to 4.4m in 2006
- Room shortages have resulted in a sharp jump in average room rates – Rs7,559 at end-FY07 vs. Rs2,004 in FY03; Approx. 105,000 hotel rooms are available in India

Future outlook of the sector
The real-estate sector offers a US$80bn-100bn opportunity over the next three years. Higher economy growth and rising income level will lead to higher demand for both residential and commercial properties. An easy and huge availability of capital will enable real estate developers to meet the demand.

Growth in the next decade should come from Tier II/III cities
- Higher real-estate prices in Tier I cities coupled with manpower and infrastructure issues may force companies to look at Tier II and Tier III cities for expanding their operations
Tier I cities- Mumbai, Delhi and Bangalore
Tier II cities- Kolkata, Hyderabad, Pune
Tier III cities- Nagpur, Ahmedabad, Indore, Lucknow, Jaipur
- Within the next three to six years, towns and cities such as Chandigarh, Jaipur, Mysore, Indore, Coimbatore, Vishakhapatnam, etc are likely to see an increase in real-estate demand from the IT/ITES sector
- According to Nasscom’s projections, Tier II and Tier III cities, which account for about 29% and 5% of the total commercial space in FY07, respectively, will increase to 44% and 20% at the end of FY17