How Real Estate became India's Sunshine Industry

India’s phenomenal economic growth over the last decade has resulted in an equally rapid growth in its real estate sector. The demand for property all over the country has grown in leaps and bounds, resulting in a rapid escalation in prices of both residential and commercial property not just in the large cities like Mumbai, Delhi and Bangalore but also in the ‘second tier’ cities such as Hyderabad, Pune and Chandigarh. If you have ever thought of the possibility of investing in this emerging property market, there is one question that has surely crossed your mind:

What has caused the current boom in the Indian Real Estate Industry?

• The growth in the Indian real estate sector has been due to a number of reasons; however the root cause has been the consistently strong growth in India’s GDP over the last few years, which resulted in an income levels rise across the board.

• Accompanying rising income levels is the pent-up demand for quality residential properties. The Indian real estate market today continues to be triggered by this demand for all kinds of property to be used as a primary residence. This is quite different from what happens in many other countries, where the motor of the real estate market is often the collective desire to own a second home or to ‘trade up’ to a better one

• Rising disposable income has resulted in a corresponding increase in consumption. The growth of consumerism in India has created a demand for new retail, hospitality and entertainment venues and this has contributed to the recent boom in the Indian construction and real estate sector.

• The driver of much of this economic growth has been the technology sector. In India, this industry accounts for the absorption of almost 80% of the commercial office space and, as it continues to grow, demand for office space can only increase.

• Urbanization has also resulted in the slow decay of the Indian joint family system where younger educated members working in well paying jobs within the Business Process Outsourcing and call-center industries seek to move into their own smaller units and create nuclear families. This has resulted in an increase in demand for housing as well.

• The government has also adopted favorable policies towards home ownership. Additionally a boom in retail banking has encouraged a vast array of banks to provide housing loans with small down payments. In 2001 the Indian government lowered interest rates to 7.5% and this made bank finance accessible to a large pool of people, which in turn fueled their demand for real estate. In recent times the government has allowed interest rates to creep upwards but they are still lower than the 15% to 20% that older Indians were used to paying. The large Indian middle class comprising of more than 300 million people can now afford to take a bank loan and buy a residential property.

• Not only has the Indian government and intermediaries made funds easily available to the citizenry, since 2005 it has relaxed the rules for Foreign Direct Investment in real estate. This has brought global investment banks such as Merrill Lynch rushing to invest in Indian real estate. Merrill lynch has forecasted that the Indian realty sector will grow to $90 billion in 2015. In line with this forecast, Morgan Stanley has invested $68 million in Mantri Developers a medium sized construction firm based in Bangalore while Merrill Lynch invested $50 million in a regional developer called Panchsheel developers. In addition, several global private equity firms have also started investing into the Indian real estate sector through real estate funds.

The aggregate impact of increased domestic demand and foreign capital investment in Indian realty in recent times has indeed resulted in a boom in the Indian real estate industry that was practically unimaginable some years ago. This increased demand, and India’s sustained economic growth are two very good omens for those Indians who can afford to invest in real estate now, and also for foreign property speculators who have the foresight to add some prime Indian property to their portfolio.