Changing phases of growth of the real estate sector in India

By Abhinash on January 9, 2017

The real estate sector is one of the most recognised sectors of India. It is the second largest employer in the country after agriculture. India’s skylines consists of housing, retail, commercial and hospitality establishments. Around 91 million people shifted in urban areas over the last decade. The 2011 census revealed that the number of towns in the country increased to 2774 from 2532 as compared to the previous year (Ministry of Urban Development 2015). This trend has continued and there is growth in housing demand in order to accommodate the rising population levels. The aim of this article is to present a brief overview of the real estate sector of India and its different growth phase, particularly during the last decade.

As per industry experts the growth of this sector is well complemented by the growth of the corporate environment, demand for office space, urban and semi-urban accommodations. The commercial spaces in India has also evolved significantly in the past 10 years. This is due to a wide range of Indian and foreign businesses have been expanding into. This sector’s growth has been particularly led by the Information Technology sector. Previously commercial properties were concentrated on central business district areas in large cities. However, with the emergence of information technology industries which came with huge office space requirement; commercial development started moving towards city suburbs. It resulted in rapid development of suburbs like Gurgaon near New Delhi, Hinjewadi near Pune, and Electronic city near Bangaluru.

The growth phase of India’s real estate growth can be divided into four time period, namely:

2001-2005: Initial growth phase

2006-2008: high growth phase

2009- 2010: declining demand and supply ( slow growth)

2011- 2014: increasing supply declining demand

Initial growth phase from 2001 – 2005

This phase is known as the initial growth phase due to the spurt of IT companies. Similarly growing trend in nuclear families, growing urbanization and higher purchasing power of consumers also led to the growth. Other major contributors to the growth include growing service industry and organized retail format. On the other hand, the supply side scenario was also good during this phase. Foreign direct investment (FDI) grew from US$17 million in 2004 to $37.5 million in 2005 (Indianground 2015). With increase in foreign investments, housing and finance companies started offering attractive loan options. Government spending in infrastructure also increased and announcement of various schemes for the promotion of real estate were made.

Growth phase of real estate sector along with the expected growth in the future
Market size of Real estate sector in India Source : (KPMG, 2015)

However, the foreign investment in real estate was permitted only to the extent of 51%, there were several restrictions that foreign realtors were vary of investing in India. Rising urban population and unmet supply during this phase let to a shortage of housing in many cities (KPMG, 2010). Employment too grew considerably during this phase, portraying a CAGR (compound annual growth rate) of 11.73% from 2001 to 2005 (IAMR 2013). Allied sectors of the real estate like construction too witnessed a growth in employment to the tune of 200% during 2001-2005.

High growth phase with increasing demand and supply

The second phase (2006-2008) was a high growth phase. This was mainly due to the fact that the government announced in 2005 removed the cap and allowed 100% foreign direct investment. Foreign investment rose to $200 million in 2007 and many foreign players such as Emaar Group, CESMA International Pvt Ltd. and Keppel Land forayed in India (MapsofIndia n.d.). Other factors which led to growth in real estate sector during this period includes:

  • growing population,
  • emphasized urbanization,
  • rising disposable incomes,
  • rapidly growing middle class and youth population
  • low interest rates,
  • fiscal incentives on interest and principal payments for housing loans
  • heightened customer expectations.
State wise inflow of foreign direct investment in India ( 2000 - 2010)
FDI in real estate sector in India (Source : DIPP, 2015)

However a notable factor during this phase is that although the size of the industry increased, it was not proportional to the high growth rate of India. Therefore the share of real estate in India’s GDP fell to 8% in 2007-08, as compared to 10.6% in 2005-06 (IAMR 2013).

Declining demand for real estate due to global financial crisis

Phase III (2009-2010) of India’s real estate saw substantial slowdown because of the global economic recession, which led to a decline in affordability and a liquidity crunch. The demand-side factors were the primary culprits of the slowdown. Due to the drastic drop in demand for commercial real estate, sharp correction in lease rentals (25-50%) took place during 2008-09. Around 600 million square feet of supply for residential space was available in 10 cities:

  1. Mumbai,
  2. Delhi NCR,
  3. Bengaluru,
  4. Chennai,
  5. Kolkata,
  6. Ahmedabad,
  7. Kochi,
  8. Chandigarh,
  9. Pune and
  10. Hyderabad.

This  accounts for 15-20% of the overall supply in India (Crisil, 2010). Also, during this phase, the number of houses in India’s rural areas grew to over 33 lakhs in 2009-10 as compared to just over 15 lakhs in 2004-05 (IAMR 2013). The overall employment in real estate and construction grew at 6% during 2009-2010 as compared to 2004-05.

Mismatch of demand and supply after the slowdown

Phase IV (2011-2014) was expected to remain a consolidation phase after the slowdown. Demand of property was expected to remain strong with capital values. In this period suppliers witnessed substantial increase in the supply of housing, especially in the urban areas. Since real estate is a capital-intensive industry, this phase was very challenging as the effects of the 2008 economic recession were felt.  Contribution of this sector to India’s total foreign direct investment inflow reduced from 10% in 2010 to 6% in 2011. However total amount of contribution increase to $1.1 billion (VCCircle 2011). But in residential real estate sector demand declined to 30% in seven major cities of India (IBEF 2016).  This was mainly attributable to the high prices, higher interest rates and cautious buyer opinions.

Great opportunity to investment in Indian real estate sector

India has vast potential to attract large foreign investments into real estate sector. Real estate is now reaching a point of saturation in developed countries. So, the demand and prices of real estate commodities are falling. In such scenario, global real estate players are looking at emerging and developing economies such as India for tapping opportunities. A factor of concern is that most developing countries are facing an atmosphere of uncertainty with respect to economic and political conditions. Such conditions are dissuading more foreign players to invest in India’s real estate.

Increasing housing shortage in India in both the rural and urban area
Housing shortage in India (in millions) Source ( National Housing Bank, 2015)

However, when compared to developed countries, emerging economies like India demonstrate more potential for growth. Investments in Indian real estate will fetch higher returns for investors as compared to other global markets. However this will also depend on initiatives taken by  the government tackles many shortcomings effectively. In the coming years, the opportunities in the real estate sector will attract more global players to India. This will help the industry to mature, become more transparent, improve management and adopt advanced techniques.


I am currently working as a Research Associate. My work is centered on Macroeconomics with modern econometric approach. Broadly, the methodological research focuses on Panel data and Times series data analysis for causal inference and prediction. I also served as a reviewer to Journals of Taylor & Francis Group, Emerald, Sage.


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