The Indian economy has been facing a tough time since 2012. A shaky local political situation, flaring local retail inflation rates, high interest rates and a continuously shaky rupee rate dominated most of 2013. This directly influenced almost every Indian industry, and investment in India fluctuated from 2012 to 2013. This decline also affected the GDP of the country, falling from 4.9 percent of GDP during April to June of 2013 to 1.2 percent of GDP during July to September 2013. Private equity investment in India also decreased from 2012 to 2013 by almost 54 percent and this directly affected nearly every industry in India. To cover the falling rupee and the shaky local economy, the Reserve Bank of India then started raising local lending rates for retail borrowers. Loans became too difficult for small homeowners and large developers, and the main market to feel the pinch was the real estate market.
Is the Effect on the Real Estate Sector Still Bad?
The real estate market has been yo-yoing up and down over the last few years. The real estate market peaked from 2006 to 2007 and by 2008, it was replaced by a slowly growing caution as the international market faced a recession. International investment decreased substantially from 2009 and fell to an all-time low during 2012. During the 2012 to 2013 period, investment in the real estate market fell by as much as 50 percent. However, times have changed for the better in 2014. Now, investment in the market has been increasing slightly since the end of 2013, and real estate rates are definitely on an increase. There are many factors contributing to this slow increase in real estate rates and we’ve tried to cover all of them here.
Increased Hiring Rates Due to an Improving Economy
A slowly increasing economy has led to rapid migration into large cities. Prime areas like Mumbai and Bangalore are seeing an increase in local hiring rates and families have been moving into these cities, India Times states. However, land tracts in these cities are exhausted and these cities are now expanding into the outskirts to provide cheap and affordable housing in every price range. This had led to developers snapping up tracts along the outskirts of large cities to create affordable housing that is still close to the city.
Optimistic RBI Rules
The Reserve Bank of India is quick to implement changes in the lending rates to cover the Indian economy. The recent fluctuation in the Indian rupee led to serious seesaws in RBI policies as it struggled to plateau the rupee to the dollar. The rupee went from an affordable Rs 40 to a dollar to about Rs 72 to a dollar in a year and then back again, up and down, until the entire country got whiplash and so did the interest rates, according to the Royal Institution of Chartered Surveyors. Thankfully, the rates have now leveled to about Rs 60 to a dollar, which has settled the RBI down considerably along with the rest of the country. The RBI also implemented two new policies: the Real Estate Regulation Bill 2013 and draft guidelines on SEBI (REITs) Regulations 2013 that could change the fate of the real estate sector considerably. Both rules will be enforcing more transparency in the sector and they will promote investor confidence in the market. The RBI also called on banks to cancel the dubious 80:20 and 75:25 schemes to encourage investors to take loans for property. Such products increased the risk on the borrower, especially in the case of builder-related issues. The move immediately dissuaded short-term investors who purchased property and flipped it again at a higher rate. It also checked price escalation and opened the market for small or first-time homebuyers.
Demand in Tier II and Tier III Cities
Large cities such as Delhi and Gurgaon have already exploited their land reserves and expansion is on to provide affordable housing. Mumbai does have property but the high investment rate and rental prices have left more than 45 percent of the property as-is, according to Business Standard. Investors are more likely to invest in satellite areas around Mumbai like New Mumbai that has affordable property but in a lower price range and a much better infrastructure arrangement. Upcoming areas like Khargar, Panvel and Rabale are seeing high demand for industrial centers and for corporate centers as well. Based on this, local authorities are now looking at Tier II and Tier III cities located around major cities as feasible housing options to deal with population overflow from major cities. Most of these cities already have a good infrastructure in place, and companies are moving into these cities to make use of the lower cost of living and cheaper housing costs. For example, the Delhi-Jaipur highway has now made it possible to connect Delhi with Jaipur and every small city in between is seeing rapid economic and housing development. Cities like Neemrana and Manesar are the new investment buzzwords and developers like the Unitech Group have already snapped up land in these cities for affordable housing.
Outlook for 2014
The year 2014 has been very good for the real estate market, with developers taking interest, lenders being understanding and buyers having a huge range of properties to choose from and purchase, according to Business Today. The future is bright as the market is expected to pick up and continue like this barring a few unexpected factors.
However, even though everything is great for the real estate market in 2014, India is now facing general elections again and it is time for some uncertainty. Almost everything in India is intimately connected to the political party at the center, and having a brand-new political party in reign could cause instability. For the last ten years, a single political party managed India and real estate policies did not change much. However, a change in the political leadership now could mean that the incoming leadership could challenge most of the policies already in place causing a dramatic upheaval. This is not particular to the real estate market, which is good and expected to be great in the future, but the future is just that, it is unpredictable.
The old Chinese curse goes, “May you live in interesting times.” Unfortunately, we in India are now living in very, very interesting times regarding the future.