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High demand drives real estate growth in India


High demand drives real estate growth in India

Last updated: November 7 2007
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  • High demand drives real estate growth in India

    Economic Times
    2nd Nov, 2007

    The real estate sector in India is on a high growth path. Several government initiatives have contributed to this high-growth environment - liberalisation of foreign direct investment norms in real estate in 2005, introduction of the SEZ Act, and allowing private equity funds into real estate.

    In addition, the government allocated Rs 50,000 crore under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) in order to improve urban infrastructure in 63 cities.

    While the Indian real estate market is not as transparent and liquid as more mature markets, it is changing fast in response to the demands of MNCs and foreign investors. Here is an overview of the office-and- residential real estate market in India.

    Office market
    The key driver of demand for office space in India remains the ITITeS sector, which accounts for about 75% of the total demand.

    According to a recent Cushman & Wakefield (C&W) report, the total absorption of office space in 2006 was approximately 35 million sq ft. Supply amounted to 40 million sq ft across major cities. By mid-2007, cumulative demand had already touched 32 million sq ft, which indicates that last year's absorption figure is likely to be exceeded this year.

    In future, a high proportion of supply of ITITeS space will come from Special Economic Zones (SEZs). According to the C&W report, of the 366 formally approved SEZs in the country, 62% are dedicated IT-ITeS SEZs. The availability of space within SEZs is expected to reduce the attractiveness of STPIs, as both developers and occupiers will enjoy considerable tax benefits within SEZs.

    In addition to the IT-ITES sector, banking and insurance, biotechnology, and research and development are some of the other fields from where demand for office space is expected to come in future.

    Residential market
    The residential sector, which accounts for 75-80 % of the turnover of the entire real estate sector, has been on a high growth path. According to the ministry of housing and urban poverty alleviation, there is a shortage of 24.7 million houses in the country.

    The LIG and EWS segments account for a majority of this shortage. However, at present the private developers are focusing largely on the middle and upper segments of the market. Rising disposable income and the trend towards nuclear families are some of the factors driving the demand for residential real estate.

    During the last one year, rising interest rates had a moderating effect on price growth, which between 2003 and 2006, have been rising at the rate of 30-50 % annually, in the major cities. Another impact of spiralling interest rates was that the market became more end-user driven, as speculators preferred to exit or stay out of the market. In future, growth in prices is likely to be moderate as more supply, which is under construction at present, enters the market. In fact, in the luxury segment, there is already talk of oversupply in some pockets of the country, such as the NCR.

    Another development during the last one-two years has been the shift in interest, both of the developer and investor, towards Tier-2 and Tier-3 cities.

    There are several reasons for this. One, land values have become exorbitant in Tier-1 cities - besides, availability of land, especially for developing large projects, has become an issue. Two, a large number of IT-ITeS companies are moving to Tier-2 and Tier-3 cities in search of cheaper real estate and manpower. This is expected to augment demand for residential real estate in places like Chandigarh, Jaipur, Nagpur.

    Another major development within the residential real estate segment is the development of integrated townships. The demand for quality lifestyle and walk-towork concept are some of the drivers of demand for integrated townships that offer commercial, retail, residential, and leisure facilities within a given area.

    Approximately, 400 townships are expected to be developed over the next five years around 30-35 major cities in the country. Hiranandani Gardens (Mumbai), JP Nagar (by Keppel Land Development in Bangalore), DLF's 9,178-acre township at Bidadi near Bangalore, and Magarpatta City near Pune are some of the examples of integrated townships.

    So far, the situation in both the office and the residential market has been that whatever is built gets sold or rented. In future, as supply increases, developers will have to be more careful about factors like location and target those segments for which they are developing their products. In this supply-rich environment, accurate demand estimates will become very important.
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