Impact of Global Market on Real Estate in India – A Perspective

The continuation of a slow-down in real estate sector in India is a matter of grave concern not only for the industry but also for the government. At present Real estate in India contributes 7% towards the GDP, this percentage is estimated to increase to 11% by 2022. The global real estate market was shaken by the financial crisis of 2009. The Indian real estate sector however was not affected and the slow-down started only in end 2012. The recovery in global real estate market started in 2013 and as per CBRE report 2015 saw a healthy growth rate of 3.7% annually. The figure below highlights the recovery from the negative growth rate of 4.6% in 2009.

It is estimated that the global real estate market is likely to grow strongly in the coming years. The multifamily investments (what we call as apartments in high rises in India) in USA have shown a growth rate of 15% in 2015. Despite a slow-down in the Chinese economy, Shanghai saw a growth rate of 6.2% in the real estate sector. The real estate sector in India may not be directly connected with the global market, but neither is it disconnected.

Real Estate market in India is primarily driven by the end user, where the sentiment has been lacking and investors have been shying away. Government has given a huge push to urban development through a number of initiatives; probably the most important aspect which is going to start the real estate recovery engine is ‘job creation’; unless you have jobs the market is denied the liquidity, which is essential for driving any economy and kicks of consumer spending. Luckily for India there lays the bright spot; Indian economy was estimated to grow at 7% in 2015 and did well to surpass that by growing at 7.4%. The figure below illustrates the estimated private consumption growth for 2016 and India is on top, tipping of China, which is huge confidence boosting indicator of things to come. 

2017 may just be the year of reckoning for the Indian real estate market. Over all till the second quarter of 2016, the southern cities have done well and have shown tangible growth rate, with Hyderabad leading the pack; Cities in north India are still to come out of the slow-down and have not shown any signs of recovery. Comparatively between the residential and commercial sectors, office space in certain cities has shown enthusiasm, however retail space market remains dull. Demand in the office space market is an indicator of creation of jobs and as brought out earlier is the initiator for market recovery. Therefore, hopefully 2017 will set-in an upturn and real estate market property trends in India would be back on track.  

Real Estate Sector in India -2016

The down trend in the Indian real estate market started somewhere in 2013, it was then linked to the economic slowdown and as other sectors were going through a slow down, so was real estate. A number of predictions have been there by various agencies predicting the recovery cycle in 2015 then 2016 and now being shifted to 2017. Though the Indian economy started its recovery cycle in 2014 with a steady growth rate of 7.5%, the real estate website in India is still struggling to catch up or show signs of any recovery. One obvious factor is that as the real estate industry has a long inventory cycle as compared to other sectors and therefore, it would take more time for its revival. 

Let’s look at the American picture as an example. The American real estate went through a crash from 2006 to 2009 i.e. 3 years and the recovery started in 2010, six years down the line it is still trying to reach normal levels and at present are the lowest compared to the historical trends. The primary reason for this has been that the first time buyer activity has been low and is still only 30% of the total share, which earlier used to be more than 40%. One can argue that we cannot compare the real estate in India with that of America; however, one needs to draw intelligent conclusions in the Indian context. A few of these are listed below.

(a)       If real estate sector in the most developed nation of the World has taken 6 years to come on the recovery path, India which is a developing Nation would at least take equal years if not more. The real estate sector in India needs to understand this aspect; there are no quick recoveries, it is a marathon and not a sprint. This implies that the sector needs to plan at investments accordingly.

(b)       China as the second largest economy in the world is crashing, Greece and Brazil have already had their setbacks. The ISIS presence in Middle-East and now Europe is creating the refuge issues leading to economic crisis. BRICS as an organisation, which was launched with a lot of hope, has failed to generate the required enthusiasm as two constituent members are struggling with their internal economies. Finally, the change of guard of the American president end of this year has led to a policy paralysis in World politics. All these are finally going to impact the global economy in the long run. Indian economy is not insulted form all this; it will face the brunt and in turn the industry.

 Indian real estate sector needs to carry out an introspection and needs to mature as an industrial sector to plan and tied over this coming phase. It needs to grow over ‘the quick buck’ syndrome, which it was riding on through the last decade.