Commercial real estate swells in an industry affected by major policy changes
The real estate market has been a serious winner for most investors in India. Given its huge propensity for growth, driven by factors such as urbanization, rising incomes and investor confidence, the sector is unlikely to be impacted significantly by the global economic downturns predicted starting 2020. This is further supported by the fact that demand continues to outstrip supply in the sector, especially in the lower-income group.
The latest report by Indian Brand Equity Foundation (IBEF), released in June 2019, states that the RE market will make up 13% of India’s GDP by 2025 and reach the 1 trillion USD threshold by 2030. Comparatively, the market was recorded at 120 billion USD in 2017.
This growth, according to the same report, is driven by the increasing requirements of industrial and service sectors including healthcare, education, logistics and e-commerce. Not to mention, India’s earnings from tourism and hospitality have grown by 10% for the last 10 years, crossing 27 billion USD in 2018.
Simultaneously, policy initiatives by the government like Pradhan Mantri Awas Yojana (PMAY), Real Estate (Regulation and Development) Act, Benami Transactions Act, Real Estate and Infrastructure Investment Trusts and easing of FDI and mortgage regulations have all substantially contributed to the growth of both housing units and financing options for commercial spaces.
Speaking of which…
Gautam Das, in his story for Business Today, proposes that the commercial sector is ripe for future undertakings, something which stands out amidst the slower rates of investment in other parts of the real estate market. His argument is substantiated by the confidence investors and enterprises continue to place in the Indian economy, evidenced by Private Equity and Venture Capital Investments accruing 4.47 billion USD in 2018 and 249 million USD in Q1 2019 in the sector.
Furthermore, the IBEF report records significant growth in the use of office spaces in IT, Banking and Finance Services, and Telecom. The impact of these growing industries on the use of commercial spaces is evidenced by
“gross office absorption in top Indian cities [increasing] 26 per cent year-on-year to 36.4 million square feet between Jan-Sep 2018. Warehousing space is expected to reach 247 million square feet in 2020 and see investments of Rs 50,000 crore (US$ 7.76 billion) during 2018-20.]”
Permitting 100% FDI in Special Economic Zones (SEZs) has had a sizeable effect as well. According to statistics released by the Department of Industrial Policy and Promotion (DIPP), the construction development sector of the reality market of India received a whopping 25.04 billion USD in April 2000-March 2019 in FDI.
These investment expansion activities are largely being undertaken by select MNCs in the market. The Blackstone Group, for instance, acquired a 50% stake in Indiabulls' office properties in central Mumbai – One Indiabulls Centre and Indiabulls Finance Centre – for 730 million USD in March of 2019. Previously, Blackstone had also bought One Indiabulls in Chennai for 137 million USD.
So, you’re probably wondering…
Well for the large part, RE is going to continue to be a growing industry, despite external economic conditions, due to the large mismatch that exists with demand outstripping supply. Not to mention, the business and development conducive policies employed by the government don’t hurt.
Corporates recognise this potential for growth and continue to expand commercial operations in a market which, owing to its massive size, appears eternally untapped.