Go Back

Indian Real Estate Industry

May, 2014


Real estate in India continues to be a favoured destination globally for investors, developers and non-resident Indians (NRIs), driven largely by investor-friendly government policies and increasing globalisation. The second largest employment generation sector after agriculture, real estate contributes about 6.3 per cent to India's gross domestic product (GDP). The foreign direct investment (FDI) in the sector is expected to touch US$ 25 billion in the next 10 years from its current US$ 4 billion.

The sector's progress is driven by factors such as rapid urbanisation, a growing trend towards nuclear families, positive demographics, rural–urban migration, ever-developing infrastructure, higher income levels and housing demand. The real estate sector, with its growing investment opportunities, is expected to post annual revenues of US$ 180 billion by 2020.

Market Dynamics

The real estate sector in India is witnessing rapid growth in the residential, commercial and industrial segments. Real estate development, once restricted to bigger cities, have shown marked progress in smaller cities and towns owing to availability of banks loans, higher earnings and improved standard of living.

The real estate sector of India is projected to post annual revenues of US$ 180 billion by 2020 against US$ 66.8 billion in 2010-11, a compound annual growth rate (CAGR) of 11.6 per cent. The demand is expected to grow at a CAGR of 19 per cent in the period 2010-2014, with Tier I metropolitan cities expected to account for about 40 per cent of this growth. As of now, Mumbai, Delhi-National Capital Region (NCR) and Bengaluru cater for 46 per cent of total office space demand in India. This demand is expected to be rise sharply in Tier II cities such as Kolkata and Chennai in the period 2010-14.

Today, Delhi-NCR accounts for about 30 per cent of the total mall supply in India. About 53 per cent of demand for total mall space is projected to come from the country's top seven cities, namely Delhi-NCR, Bengaluru, Mumbai, Kolkata, Pune, Hyderabad, and Chennai, in the period 2010-2014.

Investment Opportunities

The Indian retail realty sector is projected to grow at around 15 per cent year-on-year over the next 3-5 years as against a 12-13 per cent nominal growth of India's GDP estimated by the International Monetary Fund (IMF). If the sector does indeed manage the aforementioned growth, it will touch Rs 34 trillion (US$ 544.73 billion) by 2016.

India's office space stock is estimated to rise by 40 per cent to 642.2 million sq ft by 2017, according to a report by real estate consultancy Knight Frank India. The current Indian market offers some of the most competitive rates in the Asia-Pacific region, according to a report by property services firm DTZ. The report also states that Indian cities will have some of the fastest rental growths in the region over the period 2013-17, but will remain among the most competitive.

The share of luxury retail space in India will be 1.4 per cent by 2015, according to a report by real estate services firm Cushman & Wakefield. NCR and Mumbai, areas that have embraced the mall culture, are the two most favoured destinations for luxury retailers.

The construction development sector, including townships, housing and built-up infrastructure garnered total FDI worth US$ 22,671.95 million in the period April 2000-August 2013. Construction (infrastructure) activities during the period received FDI worth US$ 2,280.95 million, according to the Department of Industrial Policy and Promotion (DIPP).

The following are some of the major investments in the Indian real estate sector:

  • Godrej Properties Ltd plans to invest Rs 9,000 crore (US$ 1.44 billion) in 15 new real estate projects in India over the next 10 years.
  • Unitech Ltd has signed a Rs 800 crore (US$ 128.17 million) deal to lease an 800,000 sq ft space at one of its IT Special Economic Zones (SEZ) in Gurgaon, to multinational human resource firm, Aon Hewitt.
  • NRI billionaire Mr Ravi Pillai plans to purchase stake worth about US$ 100 in a special purpose vehicle floated by Pune-based realtor, Panchshil Realty. The investment will go into the construction of Trump Towers and World Trade Centre in Pune, Maharashtra.
  • Infrastructure Leasing & Financial Services (IL&FS) Ltd has claimed a project worth Rs 244.46 crore (US$ 39.17 million) from realty firm Emaar MGF for construction work at the latter's residential project at Gurgaon, Haryana.
  • French luxury hotel chain Sofitel, which is managed by Accor Group, is targeting 10 properties in India, mainly in major luxury destinations, in the next few years.
  • One of the world's top manufacturers of elevators, US-based Otis, is setting its sights on the Indian real estate market. The pace of construction in India makes the country an attractive proposition for such an investment. The company will be working with the Delhi and Hyderabad Metro projects. The former has placed an order for 222 escalators for its Phase III project, according to Otis.

Government Initiatives

According to the existing FDI policy, 100 per cent FDI in the construction development sector is permitted through the automatic route. DIPP is looking at relaxing FDI norms further to encourage investment. It has also proposed a reduction in the minimum capitalisation for wholly-owned subsidiaries from US$ 10 million to US$ 5 million, and from US$ 5 million to US$ 2.5 million for joint ventures with Indian partners.

One of the major initiatives of the Ministry of Housing and Urban Poverty Alleviation (MHUPA) is to provide affordable housing for poor people living in urban areas. The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) is one its flagship schemes, a reform driven investment programme which started with the objective of creating economically productive, efficient, responsive and inclusive cities.

The Real Estate (Regulation and Development) Bill, 2013, as approved by the Union Cabinet is a pioneering initiative aimed at delivering a uniform regulatory environment to protect the consumer, help in quick verdicts of disputes and ensure systematic growth of the sector.

Road Ahead

India needs to invest US$ 1.2 trillion over next 20 years to modernise urban infrastructure and keep pace with the burgeoning urbanisation, as per a report (India's urban awakening) released by McKinsey Global Institute (MGI).

Demand for space from sectors such as education and healthcare has opened up opportunities in the real estate sector. Also, growth in the number of tourists has led to demand for service apartments. This demand in the tourism sector is expected to generate 50,000 new hotel rooms over the next four to five years, across India's major cities.

Exchange Rate Used: INR 1 = US$ 0.0160 as on November 18, 2013

References:Ministry of Finance, Press Information Bureau (PIB), Media Report, Department of Industrial Policy and Promotion (DIPP), CREDAI, The Union Budget 2013-14