Post recession, the real estate sector in India is taking an upturn and is expected to grow at a rapid pace from the current USD 14 billion to USD 102 billion in the next 10 years. In fact, the last few months have witnessed a boost in real estate Investment. The growth can be attributed to increasing purchasing power, strengthening economy and demographics, easy availability of loans from banks and housing finance companies, falling property prices, government reforms, and professionalism in real estate sector.
On the other hand, real estate developers are increasingly stretching their capacity to meet growing demand, which has further encouraged the development of big projects with the aid of sourced financing. Traditionally, the property market was fragmented and unorganized. However, the recent past has witnessed consolidation of positions, with large real estate developers taking strong initiative to drive the market. Furthermore, there is increased availability of market information and transparency, thus, pushing the real estate sector towards organized market form.
What’s Driving Real Estate Sector in India?
Discussed herewith are the reasons that are driving the real estate boom in India –
- Booming Indian economy with an accelerated Gross Domestic Product of 8% per annum
- Increase in disposable income and growing middle class, leading to an increase in demand for residential real estate. This can boost the real estate investment in India
- State-of-the-art infrastructure facilities, with excellent roads, highways and flyovers, transportation, educational institutions, hospitals, hotels and restaurants, and more
- India is emerging as a promising offshore destination, with easy availability of highly skilled engineers and technicians
- Development of giant captive units in India, including major players like HSBC, Prudential, GE, American Express, Bank of America, and Standard Chartered
- Easy availability of home loans from banks and housing finance companies
- Government initiatives in promoting Foreign Direct Investment in real estate sector; development of Real Estate Investment Trusts (REITS)
- Falling property prices in different categories
- Professional players entering the real estate sector, well-equipped with knowledge and expertise in property development
- Growth of IT/ITES sector
Foreign Direct Investment in Real Estate Sector
The NDA government, in July 2014, announced an array of initiatives to spur real estate sector in India, including a reduction in size of projects eligible for Foreign Direct Investment (FDI) from 50,000 sq meters to 20,000 sq meters, allocation of INR 7,060 crore for real estate development in 100 smart cities, and limiting minimum FDI investment to $5 million. Government reforms to attract FDI in real estate sector, particularly in the affordable housing segment, will bring lucrative opportunities, improving the delivery and quality of low cost housing projects in years to come. Relaxation of the FDI limit under automatic route is expected to invite increased investments, luring both small players as well as NRI investment.
REITS Makes Real Estate Investment More Attractive
Establishment of Real Estate Investment Trusts (REITS) in India and listing these in stock exchange is another key driving force behind a significant boost in real estate sector. REITS provide low-risk investment options in real estate sector to small as well as big investors, regular source of income to unit holders, major contribution to the National Gross Domestic Product, increased liquidity and exit avenue to cash-strapped real estate developers, and attractive huge FD in the property market. The enormity of real estate assets that can qualify for REITS in India will reach almost USD 20 billion by 2020, and is anticipated to rank among top 5 biggest markets in the Asian subcontinent.
Key benefits of investment in REITS include –
- Investment diversification
- Improved liquidity
- Regular dividends
- Bright growth prospects
- Limpid transparency
- Improvement in debt-equity balance in property market
- Increased financing opportunities for cash-strapped real estate developers
- Tax efficiency
- Increased potential for Disposal of Non-Performing Assets
Easy Availability of Loans for Real Estate Investment
Post budget, the Reserve Bank of India has taken strong initiative towards increasing liquidity for banks, inducing further growth in the real estate sector. RBI has notified the banks to consider a home loan up to INR 50 Lakhs in metropolitan cities and INR 40 Lakhs in other locations under affordable housing scheme. Such measures have not only increased liquidity for banks, but the interest rate on home loans could also be closer to base lending rate. The leading banks are already offering an interest rate cut, processing fee waiver or discounts, and other attractive offers, luring real estate investment.
Falling Real Estate Prices
Despite the signs of growth in real estate demand, prices of properties are falling under different segments. Out of the 26 cities covered by National Housing Bank Residex figures, 13 cities have witnessed the nominal price rise during Q1 2014, while others have seen nominal price fall. However, when adjusted for inflation, residential property prices actually dropped in 21 cities, whereas there was a price hike in only 5 cities. The falling prices, especially in the residential real estate segment, are expected to drive investments in future if the trend continues.
Real Estate Investment Opportunities in India
Today, real estate investors have an array of choices, from low risk-low return opportunities to the ones with high risk-high return. Here is a glimpse of real estate investment opportunities in India –
- Pre-launch properties – Expect to get a discount on the launch price if you agree to pay 50-100% of the value of the property upfront. However, this is a high-risk investment.
- Property at launch stage – For such low to medium risk investment, you can get a good price by paying bulk money upfront or approaching the developer as a group for bulk purchasing discount.
- Properties for rent – Ready-to-possess properties, at close vicinity to key facilities, can be a good investment opportunity that comes with better liquidity as well as sell-ability.
- Commercial properties, plots and farmhouses – It can be a good opportunity to invest in offices or shops that have been already rented out by existing investors. Overall return and potential appreciation on such properties, over medium to long term, can make this investment attractive. For investment in plots and farmhouses, make sure that all legal procedures are complete and there is construction permit on the land.
Indirect investments – There is also a multitude of indirect investment opportunities such as non-convertible debentures of real estate companies, long term bonds for affordable housing, REITS, private equity realty funds or portfolio management schemes, and shares of listed real estate companies.
For Non-Resident Indians, this is the time to cash and make investments in real estate sector in India. Investments made today will ensure higher appreciation and better returns in years to come; something that NRIs won’t regret. Despite real estate price across the world is sinking, the fact remains that India’s property market is ringing, attracting huge investments, particularly FDI and NRI investments.