By Parag Sheth
India is a beautiful country, full of contradictions and contrasts, with abject poverty living side by side with affluence. There is Asia's largest slum in Mumbai, right next to the most expensive real estate in Asia. It has an ancient civilization and culture, and a rapidly growing young educated population. You can play golf in a beautiful course in the centre of New Delhi, at a course where the greens are flanked by monuments built 400 years ago.
Now, however India has come into the forefront for many more reasons. For the last few years the IT boom in India and the amazing technological advances here have fuelled a massive interest in most sectors. It has become the hub for most software development, and the outsourcing industry has seen foreign direct investment rise manifold. This has led to a rise in all ancillary sectors and has been responsible for the real estate sector becoming one of the most lucrative investments in India.
As in everywhere else in the World, property development in India can be classified into two sectors – the commercial and the retail sectors. There are a few paradigms which are unique to the Indian sub-continent and which need to be taken into consideration before any investment into real estate.
India is a large country, with an even larger population. Real Estate, especially in the metro and urban areas is scarce and is mainly driven by demand. Until a few years ago, it was the stronghold of a few, most of it was owned by individual owners and there were almost no large corporations or conglomerates involved in this sector.
Real Estate was bought and kept for generations as easy buy and easy sell systems did not exist. Even now 99% of India's urban middle class will buy a property only once, and will probably live in it all their lives.
Even if anyone wanted to buy more real estate – loans have been difficult to come by, and the interest rates were too high. The young lived with their parents, or in rented accommodation. Rents took a large chunk of their earnings, but the prohibitive interest rates, and scarcity of land prevented them from buying their own homes.
Commercial property was also very scarce. In the large metros such as Delhi and Mumbai, there were very few fully developed commercial complexes and the satellite towns had not yet come into their own.
Property Market
Today the scenario has changed amazingly, to the benefit of all those connected with India. For the last few years everyone in India has been talking about the property boom in the metros. However the sale price of large properties in the heart of Mumbai, has stunned even the most optimist of investors. An amazing $100 million dollars for a relatively small property of 5 acres seemed unrealistic, but as days went by everyone realized that the property boom in India had finally arrived and would stay for a long period of time.
There are many factors that have propelled this change - all interconnected – and mostly driven by the boom in the technology sector and the rapidly growing urban middle class. The rise in foreign direct investment, an economic growth rate of over 7%, rising salaries and a loosening of the stringent lending regulations have given rise to a real estate market which is expected to show a growth rate of 25% annually.
In the retail sector – or the residential sector, the boom has been just as great. The mortgage rates at 7.5% to 9 % are among the lowest in the world. The satellite towns of Delhi, Mumbai, and other metros have sprung up very quickly, and most developers have bought large tracts of land. These are being built into highly affordable apartments to cater to demands from the young affluent executives. The entry of large corporations into the residential sector has led to a raising of standards and a more efficient infrastructure.
Why Invest in India?
There is no real survey that has been done on the kind of return one can expect from investing into property in India. However, figures on the advent of foreign investment, and into the kind of developments ongoing speak for themselves.
The Indian government has brought in new regulations to permit foreigners to bid on construction projects, without the mandatory local partners, Sam Zell, one of America's best known real estate entrepreneurs has said "There's probably no better market in the world for low cost housing" . The easing of restrictions has seen the inflow of companies from many countries investing in the Indian market.
Until 2002, India had only 3 shopping malls but by 2008 this is expected to rise to over 250. Reliance Industries, India's largest conglomerate is building over 40,000 retail supermarkets, and as they say it – once they enter the market "it will be a bloodbath out there".
The local developers such as DLF, who in the 1980s bought large chunks of undeveloped land in the outskirts of Delhi in Gurgaon, are now reaping in the harvests of their investments. Gurgaon, after Bangalore, has become India's second largest technological hub. The return on their capital investment is believed to be between 30% to 50% . By next year – 2007, it is expected that more 35 million square feet of commercial space will be released in the market.
Outlook
The outlook for capital invested in real estate in India is very promising. The demand will exceed the supply for many more years, after all there is a population in excess of one billion people. The economy is buoyant, the demand for commercial and residential space will only keep rising. The advent of large overseas commitments in this sector, followed by the rise of corporate developers has seen the development of even the smaller cities such as Pune, Jaipur, Chandigarh etc. Most of these developers are looking at a return of 15 to 25 %
A study conducted by the United Nations has said that by 2015, ten of the world's largest cities will be in Asia (excluding Japan) and three of these cities will be in India.
A " Knight Frank India Research 'India Property Investment Review Quarter 4 2005' "
has stated that "Returns from rental income on investment in commercial property in metros is around 10.5%, the highest in the world"
As is evident, investment in to the real estate and property market in India can bring high returns, and will be an investment in the future of one the most rapidly growing economies in the developing world.
About the Author: The author of this article moderates at Totally Property - an overseas investment property forum that specialises in property in India.
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