India’s real estate growth since liberalisation

Liberalisation can be defined as the reduction of legal restriction and economic liberalisation can be defined as privatisation.  It is associated with transferring the ownership from public sector to private sector (Sally, 2007). In the year 1991, India faced a severe crisis of foreign exchange reserves which were at an all-time low. In the aftermath of the events, many sectors received a boost due to sudden increase in FDI (foreign direct investment) inflow. One of them was the real estate sector, making it one of the catalysts of the tremendous growth of the Indian economy today. It is also one of the largest employment and gross domestic product generating sectors of India. This sector is one of the few sectors in India, which enjoys 100% free FDI flow (with some exceptions). However, the real estate sector faced some tough times during the period of global economic slowdown in 2008. People lost their faith on realtors, banks withdrew the low-interest rate policies which the sector enjoyed in the past. But in the past few years, the sector witnessed a transition in the market. The buyers started to enjoy a good bargaining position and transparency has been established in the sector, which was lacking previously. According to various reports, Indian real estate sector’s future looks bright and it is predicted to touch US$180billion by 2020. Lets concentrate to some of the factors that led to the development of this sector in India (Merchant, 2016).

Changes in India’s real estate industry after liberalisation

Following the liberalisation drive in the 1990s’, a number of changes were implemented in this sector. First, among them was the sudden surge in the inflow of foreign investment in different sectors in the country. However the real estate sector was opened to foreign investment only in 2005, when 100% FDI was allowed in this sector. The government even allowed foreign venture capitalists to invest in this sector post 2005 (Saleem, 2010). As a result, India’s FDI inflow in this sector steadily increased, which is depicted in in the figure below.

FDI inflows in India’s real estate sector for the period 2001-2015 (Source: Government of India, 2017)

FDI inflows in India’s real estate sector for the period 2001-2015 (Source: Government of India, 2017)

Another remarkable change in the sector came in the form of regulatory changes over the years. For instance, a common problem in the sector was exploitation of landowners by political and corporate entities. The Land Acquisition, Rehabilitation, and Resettlement Act 2013 enables maximum protection for landowners who were vulnerable to such situations. This Act also permits unlocking of land, if it has been unused for a long time by awarding fair compensation to the landowner (Chaturvedi and Sharma, 2015). Recently, several other Acts such as Benami Transactions Act and RERA Act have been implemented. The objectives of these regulatory changes are to increase transparency in the property sale process.

Role of macroeconomic factors in the development of India’s real estate sector

Macroeconomic factors are responsible for the performance of any sector in a country (Pillarisetti and Lawry, 2008). Macroeconomic factors can consist of Gross Domestic Product (GDP), unemployment, inflation, FDI, interest rate, trade openness, housing market, etc.

Gross domestic product (GDP): The GDP or economic growth of a country is positively related to its real estate performance. Many studies have established the impact of GDP on residential and non-residential property. Figure 2 displays this relationship in the context of India for the time period 1991-2013. Due to this healthy growth of GDP, there will be high demand for real estate in the market which in turn is likely to push up the price of real estate (Singh and Komal, 2009).

Comparison between share of real estate sector in GDP and GDP at factor cost

Comparison between share of real estate sector in GDP and GDP at factor cost (Source: CSO)

Foreign direct investment (FDI): As the inflow of foreign investment increases, the demand for property also increases. Multinational companies set up their presence in the country, because of which demand for housing and commercial estate rises (Omboi, 2011). FDI has so far played a crucial role in the development of real estate in India, especially since 100% FDI was permitted in 2005. FDI also leads to increase in transparency of India’s real estate sector increased manifold. Developers are modifying their management and accounting system to make it more stringent and invite investment (Ameer and Sucharita, 2016).

Unemployment: It refers to the number of people who are unable to find employment. When the GDP of a country is high, unemployment rate remains low. Unemployment decreases the affordability of people, therefore they cannot pay mortgage on their property. Regions with high unemployment rate have lower demand for real estate (Zhu, 2010). India recently has been facing a spate of job losses especially in the IT sector. Industry experts have estimated that this is likely to affect their ability to afford property. Therefore demand for property is expected to fall in these regions in the future (Das, 2016).

Inflation: Inflation and housing prices are correlated. It refers to increase in prices and decrease in value of currency. High inflation in a country leads to rise in prices of raw material, interest rates and decrease in infrastructure development (Newell and Kamineni, 2007). It is thus a barrier in the development of real estate sector. In the year 2015 when inflation was surging in India, demand for property reduced in major cities. People found themselves unable to afford property as prices were high compared to their salaries (Datta, 2015).

Interest Rate: Interest rate refers to the rate at which a person can borrow money. A high interest rate decreases the affordability of an individual to repay their loan. A decrease in interest rate will stimulate investment, especially when price of property is high (Chetty, 2007). Interest rates in India are one of the highest in the world, hovering between 8 and 12% for property loans.

India’s real estate performance after liberalisation

Although the overall growth of the real estate sector has been impressive in India, it faces numerous challenges from direct and indirect factors. Macroeconomic factors are outside the control of the developers and buyers but are critical determinants of the sector’s growth. For instance, due to recession, unemployment had increased for a time. GDP also faced a hit, therefore real estate in cities like Gurgaon and Pune came crashing down. After that event, a few other industry related factors have stunted the growth. These are lack of transparency in the system, complex taxation system and high rates of borrowing. Therefore, although the liberalisation initiative took the industry to new heights, a lot of industry concerns have to be addressed adequately. It will increase the overall performance of the sector.

References

  • Ameer, M. and Sucharita (2016) ‘Indian Real Estate Industry analysis as per present trends’, Anvesha’s International Journal of Research in Regional studies, 1(5), pp. 13–19.
  • Chetty, R. (2007) ‘Interest rates, irreversibility, and backward-bending investment’, Review of Economic Studies, 74, pp. 67–91.
  • Das, U. (2016) Impact of FDI in real estate sector and future expectations, ET Realty2. Available at: http://realty.economictimes.indiatimes.com/news/industry/impact-of-fdi-in-real-estate-sector-and-future-expectations/50874292.
  • Datta, D. (2015) ‘Recession, inflation haunt real estate’, Business Standard, 9 August. Available at: http://www.business-standard.com/article/pf/recession-inflation-haunt-real-estate-115080900782_1.html.
  • Government of India (2017) Foreign Direct Investment (FDI) Equity Inflows, Government of India. Available at: https://data.gov.in/catalog/foreign-direct-investment-fdi-equity-inflows.
  • Merchant, N. (2016) ‘Real Estate in India: An Overview’, (October), pp. 1–27.
  • Newell, G. and Kamineni, R. (2007) ‘The Significance and Performance of Real Estate Markets in India’, Journal of Real Estate Portfolio Management, 13(2), pp. 161–172. doi: 10.1080/14445921.2007.11104238.
  • Omboi, B. (2011) ‘Factors Influencing Real Estate Property Prices a Survey of Real Estates in Meru Municipality, Kenya’, Research Journal of Finance and Accounting, 2(4).
  • Pillarisetti, R. and Lawry, R. (2008) Small Economies and Global Economics. Nova Science Publishers.
  • Saleem, S. (2010) Environment for Business. New Delhi: Pearson.
  • Sally, R. (2007) The political economy of trade liberalisation: What lessons for trade reform today? Johannesburg.
  • Singh, V. and Komal (2009) ‘Prospects & Problems of Real Estate in India’, International Research Journal of Finance & Economics, (24), pp. 242–254.
  • Zhu, Q. (2010) ‘Regional unemployment and house price determination’, Hong Kong Economic Journal, pp. 605–630.

Priya Chetty

Partner at Project Guru
Priya Chetty writes frequently about advertising, media, marketing and finance. In addition to posting daily to Project Guru Knowledge Tank, she is currently in the editorial board of Research & Analysis wing of Project Guru. She emphasizes more on refined content for Project Guru's various paid services. She has also reviewed about various insights of the social insider by writing articles about what social media means for the media and marketing industries. She has also worked in outdoor media agencies like MPG and hotel marketing companies like CarePlus.

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