“The Indian realty sector will grow from $12 billion in 2005 to $90 billion by 2015.”
- DSP Merrill Lynch
The prophecy is almost ominous to Indians who want to buy a dream home and can’t afford to do so in the light of rising realty costs. The cost of real estate is rising fast across India. While commercial Real Estate prices in Mumbai and Delhi are amongst the 10 most expensive in the world, escalation is being witnessed by tier two and tier three cities as much as the big cities.
Land has always been precious to Indians. In marriages, land is given away as dowry. Land owners in rural India virtually ruled over landless unfortunates. Land was traded, bartered and sold as far back as 600 AD, when it would be given to new settlers of a region by the King in barter for their skills. Land was considered a symbol of status, an asset that was appreciated in value; an investment as precious and as secure as gold.
The Real Estate market in India was dynamic and maintained a steady pace of growth through the 1980s. Real estate prices started plummeting in 1995. Between 1995 and 2000, the bubble built on speculations burst and prices declined by almost 30–40 per cent all across India. A marginal recovery was witnessed in 1999-2000 due to the advent of IT related activity. The realty market picked up suddenly in 2002.
Why is real estate so expensive in India? There are several contributing factors to name a few:
Demand far outstrips the supply – There has been an escalation in the demand for housing, courtesy of the economic boom. With more and more people opting to buy homes, as a secure investment for the future, as a tax saving tool or simply because they need a roof over their heads, homes are in demand. With a projected shortage of 20-25 million homes for Indians, builders and real estate developers are struggling to keep pace.
NRI interest in India as Destination Investment – In 2005, NRI investments in Real Estate was close to a whopping Rs. 90,000 crores (Rs. 900 billion). The prospect of India’s rise as an economic super power is attractive to NRIs. Liberalisation coupled with the advantage of repatriation of capital invested and rentals, dictated by the RBI, have fuelled NRI investments in real estate. Online banking and exclusive accounts have made transactions and investments easier than before.
Liberalised FDI - The Indian Government’s decision to allow 100 percent foreign direct investment (FDI) in February 2005 guaranteed a boom in the real estate industry. The 25% ROI through Indian real estate is attractive to foreign investors. Real estate funds set up to invest solely in India have raised more than $2.7 billion and new funds worth $4 billion are being planned by J.P. Morgan, Britain's Knight Frank and other foreign investors. This has tilted the balance of demand and supply and raised the price of real estate unrealistically.
Scarcity of land – The most expensive real estate in India continues to be sold in Mumbai, its Financial Capital. The reason is obvious – the city comprises a group of 7 islands, with the largest concentration of rich (2 million) Indians in the world. The demand for residential as well as commercial space in the city has ensured large scale escalation of property prices, due to scarcity of land and the capability of the moneyed class to pay the price demanded.
The IT boom – The IT and ITES sector accounts for almost 60-70 percent of demand for commercial real estate. According to NASSCOM, this sector employs 1.63 million people and the numbers are likely to grow by 50 percent by 2010. The expected demand for commercial space for this burgeoning sector is 95-110 million sq ft by 2010.
Government initiatives – The Government of India passed the Special Economic Zones Act in 2005 giving a radical boost to the realty market. Prices of land in rural India that came under the notified area escalated overnight. 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 further fuelling a promising sector.
The Real Estate market in India will continue to rise in a steady manner. It is believed by some that the growth of this industry is a bubble that is bound to burst soon. However, experts highlight a few important statistics; the Indian middle class is 330 million, the GDP of Bangalore is 6000 USD and 50 percent of India’s population is over 21. The theory of bubble bursting seems unlikely as long as the economy continues to grow at its current rate. Moreover, while the spending capacity of the average Indian is not bound to go down in the future, real estate will continue to be favored as a safe and dynamic investment option.
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