By: Suresh Castellino, National Director, Investment Services, Colliers International
Track2Realty Exclusive: Investment in real estate has been a widely debated topic, dissected in great detail. For the past few years, India has been shining, has been one of the preferred destinations for real estate investments and has attracted capital infusion from foreign institutional investors/foreign funds as well as domestic players, both institutional and retail investors. With the mainstream view being that of guaranteed growth, we have witnessed a phenomenal surge in this sector over the past decade.
Sentiments have certainly undergone a change in the recent past. Mixed opinions on the prospects of investment in this sector have already been aired. Predictions will continue to vary. While some seem to believe that this sector will experience sluggishness during the next few quarters, most others, continue to be extremely bullish even in the short and medium terms. In order to get further insight, a SWOT analysis, though not full proof will help understand the potential growth of this asset class.
Strengths – The brighter picture
India has always been a resilient market with great fundamentals for real estate and springing back positively. By virtue of the strong and increasing demand due to our large population base, this sector has grown continually and is expected to stay steady for long.
Industrial output, though lower this year, can be positively compared with most of the developed countries. IT/ITeS and industries are still expected to grow, creating employment opportunities and job stability. Rising disposable incomes and a growing middle class will also ensure robust housing demand and overall growth for real estate in India.
Moreover, Foreign Direct Investments in various sectors will continue to fuel the economy and open more doors. The newly proposed Land Bill as well as the Real Estate Regulatory Bill will bring about more transparency in the long term, hence making investments more attractive.
The above fundamentals automatically create demand for more housing and also tend to support infrastructure such as retail, office, hospitality, health care, entertainment and lifestyle business.
Weaknesses – The other side of the coin
The recent past has been a little gloomy with unstable government policies, indecisiveness and inconsistencies in issues related to tax and other involved arenas. Such situations tend to hamper the overall business landscape leading to sluggish growth, directly impacting the real estate sector.
Excessive red tape and long approval gestation periods increase delivery time and make the business riskier, hence increasing the overall cost of projects. Scarcity of capital available for real estate, with RBI curbs in this sector, results in increasing the cost of capital.
High inflation rate has been pushing construction costs up and this, combined with the high cost of capital will lead to steep pricing. Frivolous litigations and unclear land titles has plagued this industry. Lack of transparency has hampered further investments in this field with investors focusing on other secure markets.
Opportunities – Creating better horizons
Tight liquidity in the current scenario can give new investors a great pricing advantage. Moreover, with a slight dip in sales velocity, there may be potential for discounted deals. This can be an opportunity for investors with access to a larger corpus of funds and a risk appetite. The cost of owning real estate in India has always been out of reach for the lower income group. This has resulted in a huge demand-supply gap in the affordable housing sector.
There is an immense growth potential in this segment and one can cash in with limited or virtually no risk. Stringent laws including easing of mortgage enforcement in case of defaults will ultimately lead to an increase in the flow of capital to this sector hence creating further investment opportunities.
Threats – Let’s be watchful
Market instability and uncertainty may create a slight flutter in this industry. The Current economic outlook, though not dire, seems bleak and can hamper the industry growth. Soaring numbers of corruption allegation cases across various State Governments and government officials shows India in poor light and can create a cascading effect in attracting further investments.
Continuous change in policies will tend to affect investment as well. Moreover, restrictive laws governing Foreign Direct Investment into real estate make it difficult for foreign investors to look at India.
Conclusion – There’s sunshine ahead
Overall, investment in real estate in India seems relatively less volatile. The real estate sector contributes approximately 5 per cent to India’s GDP and is expected to grow further. It stands fourth in terms of attracting FDI investment in India and also remains very strong fundamentally in the long term. This can be credited to the large demand supply gap, rapid urbanization, increasing demand from the growing middle class and development of key infrastructure for corporates, retail, hospitality, education and healthcare.
Policy initiatives to monitor the sector by the real estate regulatory bill and further ease of FDI in the sector will have an incremental effect in terms of the return from real estate. This sector is set to grow with an estimated demand of 710,000 residential units and 44 million square feet of commercial office space, across the top 7 markets in India keeping the prospects of investing in Indian real estate reasonably bright.
