Property Futures

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Real-Estate Investments in India: Lucrative But Difficult

Article: potential and problems for real-estate investment in India.

Over the past couple of years, returns have been in the range of 30% to 40% but expectations for returns over the next few years are in the range of 12% to 20%.

If you happen to visit any major city in India, you will spot a lot of construction activity and the accompanying cranes and helmeted workers.  Driven by both long-term and speculative investment, residential and commercial high-rises, shopping malls and industrial parks are all proliferating.  Large private equity investments are pumping capital into the sector.

Indian property investment analysis

Indian real estate investment market analysis

The picture is tarnished by escalating prices of land and a resistance to soaring prices (responsible for a significant reduction in margins expected by investors).  Other concerns include a lack of transparency in the real-estate sector as a whole, red tape in associated regulatory processes, and the absence of title insurance in a country where there are problems in obtaining clear title.

Residential real estate

Residential real estate has grown very quickly due to:

  • Population growth
  • Continued migration of the rural population to urban areas
  • Growing employment opportunities in the booming services sectors
  • Growth in personal income
  • Demise of joint families and the rise of nuclear families
  • Increasing availability of affordable financing

Between 2006 and 2008, high demand for residential real estate led to house prices doubling prior to a subsequent slow down due to lower affordability and tight liquidity.

In the near future, you can expect continued consolidation with strong demand and modest growth in the value of housing stock.  Though there will be a substantial increase in the supply of housing in urban areas, the overall housing shortage is estimated in the region of 75 million units.

Commercial real estate

Commercial real estate has changed significantly in the past decade because of the changed business environment.

  • Growth and change are driven principally by demand from the service sector, especially information technology and information-technology-enabled services.
  • The large office requirements for this sector drive development from Central Business Districts in major cities to the suburbs.
  • The result is the emergence of areas like Gurgaon near New Delhi and Bandra and Malad near Mumbai.

The top 10 cities have roughly 70% of the total office space available in the country and with reduced demand, there is an oversupply of office space.  This in turn has had an impact on rentals—many projects have either slowed or been canceled.

The bottom line

The size of the estate market in India is estimated at USD$180 billion by the year 2020.  Demand is projected to grow at a compounded annual rate of 19% with the major metropolitan cities accounting for about 40%.

However, the markets remain opaque about critical issues, such as land valuation, while real-estate developers continue to perform poorly on accountability and corporate governance practices.

In addition, there is a lack of good infrastructure and a political environment that does not promote growth.  Having said this, there are still lucrative opportunities if you have patience and choose wisely.


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