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India
Real Estate/Construction SWOT
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Strengths
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- Regardless
of the nature and extent of the economic slowdown, growth in
construction spending in the longer term is likely to be enormous,
driven by a rising population and a growing middle class.
- The
economy grew strongly in the past decade, with a 10% fall in poverty.
India's middle classes have expanded on the back of global outsourcing
trends and local strengths of high education and excellent IT skills and
resources. The scale of real estate demand can be seen in the
substantial number of totally new townships planned, often associated
with the development of special economic zones.
- 100%
foreign direct investment (FDI) is now allowed in construction. When
global conditions recover, this will allow significant inflows of
capital to meet growing demand from the increasing middle class.
- Population
growth rates remain well above replacement level. The number of people
living in urban areas is likely to grow significantly.
- No
evidence that funding is a constraint for the developers, or at least
the larger ones, in normal economic times.
- Cheap
labour. More than half the population estimated to be younger than 25.
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Weaknesses
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- As
a result of the global financial weakness, cash flow management and debt
levels will affect real estate development. This constraint was not
evident prior to the crisis, and should ease in time.
- Poor
working conditions, especially low pay and abysmal safety
pre-requisites, are the norm for millions of construction labourers.
- Bureaucracy
is excessive by Western standards, and general infrastructure is weak.
- Lack
of structured regulatory and policy framework, or well defined operating
and financing regulations.
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Opportunities
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- The
government has pledged to build 2mn units of low-cost housing a year to
overcome housing shortages. This will do much to offset any employment
downturn.
- India's
very large cities are predicted to grow over the next 10-15 years, with
Mumbai moving from fifth to second largest city in the world, Delhi from
sixth to third and Kolkata remaining in eighth place, but seeing its
population increase from around 14mn to around 20mn.
- Banking
sector reform has long been a priority for Prime Minister Manmohan
Singh.
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Threats
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- The
global financial malaise has led to an increase in interest rates for
project financing from 9-11% to 14-16%.
- India
may be unable to cope with its burgeoning population, which has passed
the 1bn mark, posing a major threat to the economy as a whole.
- Hindu
nationalism is a growing threat to India's constitutionally enshrined
secularism. Communal tensions between Hindus and minority Muslims,
Christians, Sikhs and Buddhists can lead to violence.
- Tensions
in Kashmir are a source of instability. India has experienced a series
of serious terrorist attacks, with militant groups bombing public
places.
Real Estate Market
Overview
Key
Issues
We spoke to our in-country sources at the beginning
of 2010 and again at the end. In general, the key issues are as follows:
- 2010 was a
good year for real estate developers and other market protagonists --
after a generally difficult period in 2009. Rents in most sub-sectors
reached a trough or continued to rise relative to where they had been at
the end of 2009. A major exception is the Mumbai office market, where
gross over-supply has caused rents to fall.
- For most
sub-sectors, the key issue in the short-to-medium term is the growth of
demand relative to supply. None of our in-country sources are looking for
huge changes in capital values as a result of improving (or, indeed,
deteriorating) perceptions of the overall level of risk in India. With
exceptions, which we discuss below, most of the (substantial) new supply
is being absorbed: this is expected to continue.
- The retail
sub-segments of Bangalore and Chennai are those where the largest rent
increases -- of 30-40% -- are expected for 2012. Growing consumerism is
clearly a key factor.
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