Change is in the air in India. The world’s largest democracy voted in a new government in May this year, led by the Hindu nationalist Bharatiya Janata Party, and the economy is showing signs of a revival after several years of sluggish growth.
It is now the only one of 20 key world economies – including Canada, the US, Brazil and China – likely to see a pick-up in the momentum of growth over the coming year, thanks to a rebound in business confidence following the elections, according to a November report from The Organisation for Economic Co-operation and Development.
A new day for India?
The Reserve Bank of India predicted in October that the economy would grow by 5.5% this year, rising to 6.3% in the 2015-16 financial year. This follows two years of sub-5% GDP growth, attributable to factors including decelerating industrial production and political uncertainty.
May’s general election marked the first time in 30 years that India has had a majority government, having been previously ruled by coalitions.
The BJP has built a reputation for itself as a pro-business party that places a premium on transparency and integrity.
The previous government, under the leadership of Congress’s Manmohan Singh, saw its last years marred by a number of corporate corruption scandals. The most high-profile of these was the mis-selling of telecommunications licences by a minister in 2010, which cost the state an estimated £24.5bn.
In many ways, the BJP victory has been greeted with a sigh of relief by the business and property communities.
“It is as if someone has pressed the reset button. There’s already more confidence in the market, and international perceptions of Indian real estate have greatly improved,” one Mumbai-based fund manager said.
Although the flow of foreign direct investment into the property industry has yet to rebound following the change in government, one area where there has been an obvious pick-up is activity by private equity investors, who have invested RS59.3bn (£608m) into the sector in the third quarter – five times the previous quarter, and the highest level of quarterly investment since 2008, according to Cushman & Wakefield, thanks to improved confidence in the economy.
Source: Reserve Bank of India
Source: Reserve Bank of India
Source: JLL
* data up until Q3
Source: Department of Industrial Policy & Promotion
Market structure
India’s property market is a vast and fragmented one – unsurprising for a country that is home to 1.2bn people, or a staggering one-sixth of the global population.
Most commercial property activity is concentrated in seven major cities; Mumbai, Chennai, Hyderabad, Bangalore, Delhi, Kolkata and Pune.
Once a largely agricultural country, India is urbanising at breakneck speed; some 410m Indians live in cities, according to the latest UN statistics, and this figure is likely to double by 2050.
The National Capital Region (Delhi and Gurgaon) is the world’s second-largest urban agglomeration after Tokyo, with a population of 25m (UN estimates) while Mumbai, South Asia’s financial and commercial nerve centre, is the world’s sixth-largest city with a population of 12.7m. Bangalore, India’s answer to Silicon Valley, has a population of over 10m.
The services sector is the main driver of the economy, accounting for 68.4% of growth last year, followed by industry at 21.5% and agriculture at 13.7%. IT and business process outsourcing contribute 7.5% to GDP today, up from just 1.5% in 1998, according to NASSCOM, the industry’s Delhi-based trade body. Unsurprisingly, this sector wields a considerable influence over the commercial property market, accounting for 62.1% of grade-A office space take-up in the year to date, according to Cushman & Wakefield.
One major difference between India’s real estate scene and that of the UK is the sheer dominance of residential property; this is considered very much as a core part of the commercial property sector rather than an alternative asset class. Over 80% of the commercial-grade stock currently under development is residential, according to JLL.
Opening up the market
Foreign investment into Indian real estate is still a fairly recent phenomenon, having only been permitted by the government since 2005.
The latest budget has brought in a raft of changes designed to ease flows of FDI into the real estate sector, which has up until now been a difficult sector for overseas investors to crack.
REIT guidelines were published by the Securities and Exchange Board of India in September and could pave the way for a REIT regime by as early as the end of 2015. This could help investors and developers to raise up to $12bn (£7.7bn) in the first three to five years, according to projections from Cushman & Wakefield.
“This is good, robust legislation and is a sign of the government’s maturing approach towards real estate,” says Gautam Mehra, executive director in PwC’s Mumbai office.
“A lot of investors and developers are eager to raise capital, and REITs should attract a good level of interest from overseas.”
Other changes include a reduction in the minimum built area of project in which foreign investment is allowed, from 50,000 sq ft to 20,000 sq ft.
