EXECUTIVE SUMMARY: This internship program at The Prestige Constructions included three projects. Two of them in The Forum Mall and another one at the construction site of the Exora Business Park. The nature of these three projects is different from each other. Project 1: The first project at the Forum Mall was to analyze the reasons for the fall in the sales of the gift vouchers of The Forum Mall and to come out with a promotional strategy as there was no priory existing one. The promotional strategy was of two different types, one for the indivusal buyers and the other one for the corporate buyers.
This project also included a training secession for the marketing team present at the forum. Project 2: The second project was at the construction site of The Exora Business Park. This was actually to know the general management and also to know the format of the business carried out and also to know what measures were taken to comply the construction with respect to that of the client. Knowing the basic concepts of civil engineering, analyzing the follow up work and at last coming up with a printed format of the enquiry reply form to assist the marketing team Project 3:
The third project was again in The Forum Mall and this time it was to increase the loyalty of the customers via face book by conducting many contests etc. on the other side the in house brands would get a free space for their promotions in return to the free gift vouchers. Convincing the brands to take part in this program is also part of it. INDUSTRY OVERVIEW Building up India Outlook for India’s real estate markets Above-average economic growth in India. Strong population growth, a large pool of highly-skilled workers, greater integration with the world economy nd increasing domestic and foreign investment are expected to drive India’s real GDP by 6% p. a. over the next 10 to 15 years. Services outsourcing revving up office demand. India is the prime destination for IT services outsourcing. In the coming five years, at least 55 million m? of extra office space must be completed in the premium office segment alone. 600 new shopping centres by 2010. India’s burgeoning middle class will drive up nominal retail sales through 2010 by 10% p. a. At the same time, organised retail is becoming more important.
At present organised retail accounts for a mere 3% of the total; by 2010 this share will already have reached 10%. By 2030 India will need up to 10 million new housing units per year. Rapid population growth, rising incomes, decreasing household sizes and a housing shortage of currently 20 million units will call for extensive residential construction. The financing of owner-occupied housing in particular holds out enormous market potential. Capital market still underdeveloped. The total stock of commercial property is estimated at over USD 300 bn. So far the invested market accounts for only USD 4 bn of this.
Capital market products, such as commercial mortgage-backed securities or listed property vehicles are still almost entirely lacking. Heed risks. Property investments in India are not risk-free. Market transparency is far behind European or US standards. It is therefore vital for foreign investors to have a professional local partner. The lack of liquidity and upward pressure of pricing remain the main concern within the market. Growth potential on India’s commercial real estate market Change in total stock, 2006 – 2010 800 600 400 200 0 40 30 20 10 0 OfficeRetailLogistics Capital value (bn USD, rhs)Development area (m sf. lhs) Sources: RREEF Research, DB Research Introduction Fertility declining in India Number of children per woman 7 6 5 4 3 2 1 0 1955-1960 1970-1975 1985-1990 2000-2005 ChinaEuropeIndia Source: UN Population Division, medium variant2 India’s population is poised to grow Number of inhabitants, m 1800 1600 1400 1200 1000 800 600 400 200 0 1950 1970 1990 2010 2030 2050 ChinaEuropeIndia Source: UN Population Division, medium variant 3 India is considered the birthplace of the number zero. In recent years, however, the subcontinent has hit the headlines with rather larger numbers.
Home to roughly 1. 1 billion people, India is the second most populous country after China and is expected to overtake it by 2030. Its economic transformation over the past decade has pushed up real GDP growth to an average of 6% p. a. since 1992. Particularly in the services sector, India is being discovered as an important business location. Its favourable demographic and strong economic impetus make the country an attractive place for property investors, given that demand for property is determined chiefly by business development and demographic trends.
This does not mean, however, that investment in Indian real estate is risk-free. This paper presents an analysis of the opportunities and risks in India’s real estate market. Combined with the size and heterogeneity of the country, insufficient data makes it ambitious to depict all its sub-markets. Attention therefore focuses on the general trends in office, retail and housing markets, with a more in-depth examination of the most important locations (Delhi, Mumbai and Bangalore). The paper rounds up with a discussion of India’s real estate investment market. Macroeconomic environment
Powerful demographic impetus About one in every sixth person on earth lives in India, and the growth rate of the population is still rapid. The present fertility rate is just over three children per woman. Although considerably lower than in the 1960s or 70s when women gave birth to an average of five to six children, it is still far higher than in, say, China (1. 7 children per woman) or Europe (1. 4 children per woman). Since the lower birth rate is primarily a reflection of better living conditions in India, the rate of population growth has moderated to just 1. % p. a. Since 1970, the improved conditions have also caused life expectancy to increase by 15 years to around 65 years at present. In addition, during this period, infant mortality has been halved. The high birth rates and fall in infant mortality over the past few decades imply that India’s population is very young. One in every three Indians is under the age of 15, and only one in three is older than 35. This compares it favourably against China, where nearly 50% of the population is older than 35, and roughly 60% in Europe. The three demographic trends, i. e. igh but falling birth rate, in- creasing life expectancy and declining infant mortality, are expected to persist in the coming years. Only during the third decade of this century will the population growth rate drop below 1%. Consequent- ly by 2030, India looks set to be the most populous country on earth. By 2050, roughly 1. 6 billion people will live on the Indian sub- continent, 200 million more than in China. The already impressive number of 700 million people of employable age1 in India is expected to grow by another 250 million in the next 20 years. Additionally, the valuable economic reform policies People in the age group between 16 and 65 are considered as being Fixed capital investment impels growth real, % yoy 14 12 10 8 6 4 2 0 97 98 99 00 01 02 03 04 05 06 07 GDP Dom. consump. Gross fixed cap Sources: RBI, DB Research 4 Services are growing in importance % share of service sector in GDP 70 60 50 40 30 20 10 0 89 91 93 95 97 99 01 03 05 07 AgricultureIndustry Services Sources: RBI, DB Research 5 Long-term growth rates (2006-2020, p. a. ) | GDP| GDP per cap| India| 5. 5| 3. 9| China| 5. 2| 4. 4| USA| 3. 1| 2. 1| Germany| 1. 5| 1. 4| Turkey| 4. 1| 2. 8|
Source: DB Research6 implemented since the early 1990s have created the proper foundation for translating population growth into powerful economic growth. The economy is booming2 In the past ten years, real GDP accelerated to an average of 6% p. a. , growing much faster than in earlier decades. In 2005, real GDP is expected to accelerate at least 8% from the previous period, with investment to remain a strong impetus to growth. There are at least three reasons for its sustained acceleration. First, the economic liberalisation in the early 1990s has integrated the country into world trade.
This has benefited the services sector in particular, with many companies from the United States and Europe discovering the subcontinent as an attractive offshoring destination. 3 Second, India possesses a vast pool of highly skilled technicians and engineers. Some 200,000 engineers graduate from Indian universities each year, roughly six times as many as in Germany. But even this large number of graduates may fall short of meeting the strong demand for highly skilled staff. A survey of Indian head- hunters revealed that the number of urban jobs soared by 21. 5% in 2005, with a further 23% forecast for 2006. This implies that salaries for university graduates are on course to increase markedly. This is already an ongoing phenomenon. In a publication on salary trends in Asia, Hewitt Associates, a con- sultancy, illustrated that salaries in India rose by an average of 13. 5% in 2005 from 2004, the steepest climb among the countries reviewed. In the IT industry, pay packets were almost 18% bigger. 5 Third, public spending on road and transportation infrastructure is expected to climb. This is key to the government’s long-term growth strategy – and will serve as a positive stimulus to the construction industry.
High growth trend in the long term6 The current engines of economic growth – population trend, human capital, openness of the economy and rising investment – will remain the key drivers of India’s economic growth in the long run. Deutsche Bank Research’s long-term growth model, Formel-G, depicted India as the growth star performer over the period 2006 to 2020 among 34 developed and developing economies. This puts it ahead of China and Turkey. GDP per capita in terms of purchasing power parity (PPP) is expected to climb by almost 4% a year over the next 15 years, with purchasing power doubling over the period.
Real GDP is expected to average 5. 5% – with potential to rise even further to 6%, reflecting India’s huge efforts to build up its infrastructure. 2 For further details on this section see Asuncion-Mund, J. (2005). India rising: A medium-term perspective. Deutsche Bank Research. Current Issues. June 3, 2005. Frankfurt am Main. 3 For further details see Schaaf, J. (2005). Outsourcing to India: Crouching tiger set to pounce. Deutsche Bank Research. Current Issues. October 25, 2005. Frankfurt am Main. 4 Goyal, M. (2005). The job boom.
In India Today, February 27, 2006. 5 Hewitt Associates (2005). The Annual India Salary Increase Survey, http://was4. hewitt. com/hewitt/ap/resource/newsroom/pressrel/2005/11-23- 05india. htm. 6 See Bergheim, S. et al (2005). Global growth centres 2020: Formel-G for 34 Unemployment gradually declining Number of unemployed, m 45 40 35 30 25 20 15 10 5 0 85 87 89 91 93 95 97 99 01 03 05 07 Source: Global Insight7 No convergence of living standards NDP by states 9 % p. a. 8 Still major tasks ahead This development, however, is taking place from a very low base.
GDP per capita in nominal and PPP terms in 2005 was only roughly USD 1,100 and USD 2,800 respectively, reflected in several social indicators which remain inadequate. For example, although literacy standards in recent decades have risen to about 65%, this still leaves around 400 million people who are illiterate, lending little scope for pay increases. In addition, of the 40 million people registered as out of work (equivalent to an unemployment rate of around 10%) the large majority presumably comes from this category. But even this masks the true scale of the unemployment problem, given that of he roughly 400 million people in the workforce, only about 27 million belong to the organised sector. This implies that more than 330 million people are in the non-organised sector; hence, most are underemployed. The low industrial base in India could explain the insufficient work for unskilled labour and why more than 70% of the population still live in rural areas (see below). Regional differences important In a vast and heterogeneous country as India it is evidently important whether a property is situated in a rapidly expanding or a stagnant region. 7 India has 28 states, six union territories and the capital Delhi.
Huge income disparities exist between these regions. In Delhi, for example, average net domestic product (NDP) per person is 150% above the national average, while Bihar in India’s northeast – home to no less than 90 million – is only 31% of the Indian mean. Major regional differences also exist in terms of economic momentum. Taking only the larger states with a population of at least 50 million, net domestic product per capita rose by between 1. 5% p. a. in Uttar Pradesh and 5. 5% in West Bengal from 1993 to Tripura 1993 – 2001 7 6 5 4 3 2 y = 0. 0001x + 2. 2866 1 R2 = 0. 09050 -1 001. It is interesting to note that there are no trends towards convergence between the regions – at least, not in the past ten years. In fact, a positive correlation can sooner be established between the level of NDP per capita from 1993 and the average growth rate up to 2001. Although not very marked, this does become more pronounced if the statistical “blip” Tripura is excluded from the sample. This suggests that, if at all, the gap between the regions has become wider rather than narrower during the upswing. 8 0102030 Level of NDP, 1993; in ‘000 INR Sources: CSO, DB Research 8
Finally, the existence of clear business clusters is also striking. In some smaller states the manufacturing sector is virtually non- existent, whereas in Goa, Gujarat or Jharkhand industry accounts for almost one-third of economic output. 7 In terms of area, India is almost ten times the size of Germany. 8 This conclusion is also reached by Sachs, J. D. et al (2001). Understanding regional economic growth in India. In CID Working Paper No. 88, Harvard University. Overview of the Indian states States Largest city in the state Per cap NDP1) as share of Indian mean Average growth rate of per cap NDP
Share of industry sector in NDP Share of services in NDP Leading universities IIT or IIM2) Name| Population m (2003)| | Name| Population’000 (2001)| Index (2003-2004)| % (1993-2001)| Last availabledata| | Andhra Pradesh| 77. 9| | Hyderabad| 3,637. 5| 96. 1| 4. 58| 14. 9| 56. 7| | ArunachalPradesh*| 1. 1| | Itanagar| 35. 0| 81. 3| -0. 11| 2. 6| 60. 5| | Assam| 27. 7| | Guwahati| 809. 9| 55. 3| 0. 75| 17. 0| 49. 4IIT (Guwahati)| | Bihar| 86. 8| | Patna| 1,366. 4| 31. 4| 1. 98| 4. 1| 61. 1| | Chhattisgarh*| 21. 7| | Raipur| 605. 7| 63. 9| 1. 39| 28. 1| 50. 1| | Delhi (NCR)3)| 14. 8| | New Delhi| 9,879. 2| 253. 3| 4. 6| 9. 9| 88. 9IIT (Delhi)| | Goa*| 1. 4| | Panaji| 98. 9| 254. 9| 6. 60| 34. 4| 57. 1| | Gujarat| 52. 6| | Ahmadabad| 3,520. 1| 142. 2| 3. 83| 30. 5| 48. 2IIM (Ahmadabad)| | Haryana| 22. 0| | Faridabad| 1,055. 9| 133. 2| 3. 13| 23. 8| 50. 5| | HimachalPradesh| 6. 2| | Shimla| 142. 6| 107. 4| 4. 74| 17. 5| 55. 2| | Jammu &Kashmir*| 10. 7| | Srinagar| 898. 4| 70. 1| 1. 79| 1. 8| 65. 4| | Jharkhand*| 28. 0| | Ranchi| 847. 1| 70. 9| 3. 05| 29. 8| 50. 5| | Karnataka| 54. 4| | Bangalore| 4,301. 3| 107. 1| 4. 93| 13. 6| 62. 7IIM (Bangalore)| | Kerala| 32. 6| | Thiruvananthapuram| 745. 0| 102. 6| 3. 81| 11. 1| 72. IIM (Kozhikode)| | Madhya Pradesh| 63. 4| | Damoh| 112. 2| 70. 2| 1. 97| 16. 4| 49. 9IIM (Indore)| | Maharashtra| 100. 3| | Greater Mumbai| 11,978. 5| 136. 0| 2. 33| 19. 6| 67. 3IIT (Mumbai)| | Manipur| 2. 5| | Imphal| 221. 5| 74. 2| 3. 08| 8. 7| 62. 1| | Maghalaya*| 2. 4| | Shillong| 132. 9| 88. 3| 4. 11| 8. 4| 66. 3| | Mizoram*| 0. 9| | Aizawl| 228. 3| n. v. | n. v. | 0. 4| 73. 3| | Nagaland*| 2. 1| | Kohima| 78. 6| 108. 6| 3. 12| 0. 2| 66. 4| | Orissa| 37. 8| | Bhubaneswar| 648. 0| 54. 5| 2. 42| 13. 7| 49. 4| | Punjab| 25. 1| | Ludhiana| 1,398. 5| 133. 9| 2. 26| 15. 7| 43. 9| | Rajasthan| 59. 3| | Jaipur| 2,322. | 72. 6| 4. 17| 18. 1| 53. 0| | Sikkim*| 0. 6| | Gangtok| 29. 2| 104. 4| 5. 09| 7. 3| 71. 2| | Tamil Nadu| 63. 6| | Chennai| 4,343. 6| 113. 8| 4. 48| 18. 6| 68. 7IIT (Chennai)| | Tripura*| 3. 3| | Agartala| 190. 0| 95. 4| 8. 02| 4. 4| 68. 9| | Uttar PradeshUttaranachal*| 174. 48. 8| | KanpurDehra Dun| 2,551. 3527. 9| 50. 973. 8| 1. 462. 04| 13. 59. 1| 52. 7IIT (Kanpur), IIM (Lucknow)56. 3IIT (Roorkee)| | West Bengal| 82. 8| | Kolkata| 4,572. 9| 99. 4| 5. 51| 13. 3| 58. 7IIT (Kharagpur),IIM (Kolkata)| | India (incl. | 1,068. 2| | | | 100. 0| 4. 28| 21. 8| 59. 6| | 6 territories) * = last available data of NDP 2001 or 2002 ) NDP=Net Domestic Product=Gross Domestic Product less depreciation 2) IIT=Indian Institute of Technology; IIM=Indian Institute of Management 3) NCR (national capital region) is not a state. We list it here as Delhi is one of the major property markets. Sources: Census of India 2001, RBI, Citypopulation. de, DB Research9 Cities form the hubs of development Classifying Indian cities Tier IDelhi, Mumbai, Bangalore Tier IIHyderabad, Pune, Chennai Tier III Kolkata, Nagpur, Ahmada- bad, Chandigarh, Indore, Kochi, Trivandrum, Mangalore, and about 30 more cities Source: JLL 10 India’s large cities and agglomerations Population, m
For centuries cities have been the centre for economic and cultural development. On the one hand, urban marketplaces enable cost- efficient barter processes, resulting in a meaningful division of labour. And on the other, cities guarantee economies of scale for the funding of public goods such as education. Indian cities are customarily divided into three groups: Tier I comprises the capital Delhi, the financial centre Mumbai and the IT hub Bangalore. Tier II consists of Hyderabad, Pune and Chennai, the cities targeted by companies as alternative offshoring destin- ations and now possess a well-trained pool of labour.
The cost advantage of Tier II cities over those in Tier I is estimated at 15 to 20%. But given the rising costs in Tier II cities as well in recent years, companies are increasingly eyeing Tier III cities. These are cities with populations of more than a million but are not yet completely established as outsourcing and offshoring destinations. Their absolute cost advantage over Tier I cities is estimated at | 2001| 1991| 2001| 2005| Mumbai| 11. 9| 12. 6| 16. 4| 19. 9| Delhi| 9. 8| 8. 4| 12. 8| 19. 7| Kolkata| 4. 6| 11. 0| 13. 2| 15. 7| Chennai| 4. 2| 5. 4| 6. 4| 7. 6| Bangalore| 4. 3| 4. 1| 5. 7| 7. 1| Hyderabad| 3. | 4. 3| 5. 5| 6. 7| Ahmadabad| 3. 5| 3. 3| 4. 5| 5. 6| Pune| 2. 5| 2. 5| 3. 8| 4. 5| Surat| 2. 4| 1. 5| 2. 8| 3. 7| Kanpur| 2. 5| 2. 0| 2. 7| 3. 3| City Agglomeration between 15 and 30%. 9 According to the last official estimate by the Census of India, there were a total of 27 cities with more than one million inhabitants in 2001, in which nearly 75 million people lived. By 2005 this had risen to 35 cities with a population of more than one million and almost 500 with at least 100,000 inhabitants. 10 However, given that many cities sprawl beyond the official city boundaries, it makes more sense to focus on urban areas.
In 2001 35 such agglomerations with at least one million people existed, inhabited by around 108 million people in total. Meanwhile, almost 150 million people are believed to live in the 44 urban areas housing Note: The Census’ boundary of agglomerations (1991, 2001) must not equal the boundary of Thomas Brinkhoff (2005). Therefore it is not sensible to calculate growth rates from 2001 to 2005. 11 Sources: Census of India 2001, Thomas Brinkhoff: City Population India’s population is largely rural Share of urban population, % 70 60 India 50 China 40 30 20 10 0 950 60 70 80 90 2000 10 20 30 Source: UN Population Division 12 a million people and more. The Mumbai and Delhi regions alone are home to almost 20 million people each. But these staggering figures must not be allowed to detract from two facts. First, India is still a predominantly rural society. While more than 300 million Indians now live in an urban environment, this means that nearly 800 million people are still at home in rural areas. The degree of urbanisation, or the proportion of people living in the cities, has risen steadily in recent decades to just over 28% at present.
This still compares much lower than in China with 40%. Second, the urban population expanded more rapidly from 1981 to 1991 than in the following ten years up to 2001. The rate of growth in the city-dwelling population has slowed by around 0. 5 of a percentage point. This is true not only of the cities with more than one million inhabitants, but indeed of the biggest 100 cities in the country. Cities will continue to grow The United Nations Population Division (UNDP) expects the degree of urbanisation to grow over 40% by 2030, implying that urban population will grow by 2. % per annum in the next 25 years. Hence, while the rural population increases only marginally, urban population will double by 2030 to around 600 million people. Applying this average to the biggest urban agglomeration areas in the country, it follows that in 2030 Mumbai will have a population of Mega-cities continue to grow Population, m 40 35 30 25 20 15 10 5 0 1980 1990 2000 2010 2020 2030 MumbaiKolkata DelhiChennai Bangalore Sources: Census of India 2001, DB Research 13 Space utilisation per worker (2005) | Spaceper| Total occupancycosts (EUR) per| worker| work station p. a. | Bangalore| 14 m2| 2,734| Mumbai| 12 m2| 7,062| Beijing| 10 m2| 3,890| Singapore| 11 m2| 3,970| Frankfurt| 222 m| 10,69215,599| LondonNew York| 2220. 9 m| 10,500| 10. 5 m Source: DTZ, 2006 14 roughly 35 million and Kolkata and Delhi just under 30 million then. 11 This could still be considered a conservative estimate as it puts urbanisation in India then only at China’s level today. Assuming that India’s industrial activity and high-end services grow at above- average pace, the rural exodus could speed up sharply, similar to the development in China.
Were India’s urban population to increase at a similar pace to the Chinese urban population between 1980 and 2000 (by more than 4% p. a. ), the number of people living in Indian cities would soar from 320 million today to 900 million in 2030. Urbanisation would then exceed 60%, roughly in line with the current level in many east European countries. Further, were the mega centres to expand at the same rate, the Mumbai agglomeration area would have a population of over 50 million by 2030, and the Delhi and Kolkata agglomerations a good 40 million.
There are two clear outcomes following from this. First, India’s cities must gear up to a dramatic increase in size. Their infrastructure (schools, roads, airports, seaports etc. ) and housing capacities will need to expand massively. Second, the accelerated rate in urbanisation throws into particularly sharp focus the possibility that established centres (i. e. Tier I cities) are already straining the limits of their capacities, leading to above-average expansion in the second-tier cities. 12 The office markets are benefiting from offshoring activities
Thanks to its well-educated and English-speaking expert workforce, in the last few years India has developed into the most important market for software and IT services (ITES), as well as for IT-based business processes (BPO). These sectors turned over a total of USD 28 billion in 2004 and this could double by 2007. 13 The Indian office market has benefited from this trend in the process. According to the estimate of the consultancy firm Jones Lang LaSalle, up to 70% of the demand for office space is driven by the over 7,000 Indian IT and ITES firms. 5% is accounted for by financial service providers and the pharmaceutical sector, with the remaining 15% due to other sectors. Production and operating cost reductions are often cited as the primary reasons for increased outsourcing by US and European companies to India. 14 Occupancy costs are also lower in India than in most of the Western conurbations, although in most cases this difference is not enough reason for relocation. The amount of space needed for an office workplace in Mumbai or Bangalore is no lower than it is in London. The most important office locations are in the Central Business Districts (CBD).
It has only been in the last few years, as space became more limited in the CBDs and new offices with higher 11 This calculation is based on the Census of India area demarcation. The demarcation in Thomas Brinkhoff’s Citypopulation (www. citypopulation. de) produces even higher values. 12 The Ministry of Urban Employment and Poverty Alleviation calls the strengthening of smaller urban centres one of the most important tasks for the future (see Ministry of Urban Employment and Poverty Alleviation (2005). National housing and habitat policy, New Delhi, 1. 12). 13 See Schaaf, J. (2005).
Outsourcing to India: Crouching tiger set to pounce. Tier II and Tier III cities still very intransparent Office market of 33 million square feet Office projects moving north constructional quality and lower prices were built in peripheral locations, that demand has shifted from downtown areas out to the new locations. Most recently, additional development areas, with a mixture of office, retail and residential, have been built. Just like other global locations, the most important locational factors are the availability of staff, ease of access by car and public transport and regional growth potential.
In Indian cities it is also important to analyse the technical infrastructure (e. g. electricity, telephones and water supply) to ensure that it meets requirements. The following section discusses the most transparent and liquid office markets of Delhi, Mumbai and Bangalore. It is worth noting, however, the enormous potential held by the growing markets in the Tier II and Tier III cities, such as Pune, Hyderabad or Chennai. Owing to insufficient information, smaller stock of real estate and a poor level of infrastructure, these markets are still relatively illiquid and harbour greater risks.
Mumbai – India’s financial centre Mumbai is India’s economic and financial centre. The central bank (the Reserve Bank of India), the two most active stock exchanges in the country (the National Stock Exchange and Bombay Stock Exchange), the capital markets supervisory authority (the Securities and Exchange Board of India) and numerous domestic and foreign financial service providers have their headquarters there. Thus, many IT and ITES firms catering to the financial sector have established themselves in Mumbai and its surroundings. Jones Lang LaSalle estimates the office market at a total of 33 million square feet.
About 12 million square feet of this total are classified as Class A and Class B space15, arguably not half as large as the office market in Dusseldorf or Amsterdam. The CBD in the southern tip of Mumbai (Nariman Point) is regarded as the prime office location. As Mumbai is a peninsula, projecting into the sea, the coastline guarantees a shortage of space. The cityscape in the CBD is characterised by numerous buildings from colonial times. This historic city centre is a natural location not just for state institutions, such as the Bombay High Court, but also for company head offices, international firms and business-related service providers.
For many companies the central location, with proximity to very good hotels, has become an important locational factor. The majority of the buildings in this area, however, only meet Class B standard. As only a limited number of large-scale, modern buildings can be constructed in the CBD, several new centres – Secondary Business Districts (SBD) – have emerged in the last few years. Most of the development has been towards the north, along the west coast. The first SBDs to be developed were in Bandra Kurla, Worli and Prabhadevi.
There are also peripheral locations in Andheri and Malad – located even further to the north, in order to meet the growing demand for high-quality and at the same time good-value office space. The SBDs in Bandra Kurla and Worli now count as extensions to the CBD. Modern and generously-sized office buildings have attracted many large undertakings. These include the National Stock Ex- change, the Bank of India and ICICI Bank, as well as an increasing number of multinationals like Motorola and Cisco. Many IT and ITES Mumbai: Vacancies down, rents up
Vacancy rate (%, lhs), gross prime rent (INR per month, rhs) companies have then followed their clients. The peripheral locations are along the arterial roads and closer to the residential areas. Mumbai office rents have risen sharply The demand for offices in the whole market continues to be dominated by IT companies, followed by financial service providers and pharmaceutical companies. The IT companies are mainly looking for large, contiguous space of between 10,000 and 30,000 square feet. In the last few years the strong level of demand has not 16 14 12 0 8 6 4 2 0 2001 2002 2003 2004 2005 180 160 140 120 100 80 60 40 20 0 only reduced the vacancy level from 13% in 2001 to just over 5% in 2005, but rents have also reacted. Prime rents climbed from INR 130 per sf. per month in 2003 to INR 160 last year. In the CBD there have even been a few contracts at as high as INR 250 for Class A space. The reason for rents rising by “only” INR 30 in the last few years can be attributed to the constant shifting of demand to the north. New and high-quality buildings are being constructed on cheaper development land.
The SBDs are therefore acting as a brake on rents in the city centre. This also means, however, that Vacancy ratePrime rent Source: JLL 15 Extensive developments Catch-up potential in office market rents in the SBD are only slightly lower than those in the CBD. In isolated cases up to INR 200 per sf. is being paid for Class A offices in secondary locations. The high demand has also led to extensive new development. In 2005 a total of around 3. 2 million sf. was completed, amounting to a quarter of the high-quality office space in Mumbai.
At the same time the net absorption was around 3. 5 million sf. New developments (2006 approx. 3. 5 million sf. , 2007 approx. 2. 5 million sf. ) are projected to continue in the next few years, matched by an expected increase in demand. The majority of the space is being built in Bandra Kurla. The extensive development activity will result in increased importance for the secondary locations. In addition, increasing numbers of factory sites in the city are being sold to private investors. In total, there are 58 of these derelict industrial sites in Mumbai, with around 60 million sf. f space. Projects have already been completed in 23 of these locations, with additional office buildings expected to be completed from 2007. The Supreme Court has, in principle, opened the gates to project development, although the Environment Ministry has tied up development with an approvals procedure. It can take up to nine months to obtain the relevant clearance. The majority of the space planned for 2006 will not be ready until the end of the year. For this reason, further increases in rents are expected during the current year.
In 2007, however, in view of the extensive new developments, rents may only increase moderately. The capital Delhi is growing beyond itself Delhi, India’s second biggest city, is the seat of government and represents the central traffic hub in the north of India. Delhi’s office market extends beyond the metropolitan area to the neighbouring towns of Gurgaon in the south and Noida/Greater Noida in the east. Known as the Northern Capital Region (NCR), the agglomeration encompasses a stock of office space of around 30 million sf. a quarter of which is in the premium Class A. This is extremely low for a city of this size and implies a huge catch-up potential. As in the other metro cities, the main sources of demand are IT and ITES companies. In addition, Delhi has established itself as a call centre hub, which draws on the workforce’s excellent and almost Delhi’s office market: Strong increase in rents Vacancy rate (%, lhs), gross prime rents (INR per month, rhs) accent-free English language skills. Demand for space has spiralled in recent years. Net absorption in 2005 was around 3. 3 million sf. up from roughly 3 million in 2004), representing no less than 10% of the total office stock. New building construction of around 3 million sf. in 2005 was insufficient to meet the demand, driving down 20 15 10 5 0 2001 2002 2003 2004 2005 200 175 150 125 100 75 50 vacancy rates. CBD still prime location The CBD is located in the centre of New Delhi. Most of the office buildings date from the 1980s and 90s and are categorised only as Class B. Banks and corporate service providers (e. g. lawyers, tax consultants) with close proximities to the ministries are also situated there.
The new Metro railway network makes it easier to reach Vacancy ratePrime rent Source: JLL 16 Rising satellites High demand for office space downtown Delhi. The prime address, both for office use and retail, is around Connaught Place, although there is very little chance of putting up new buildings there. Demand for modern space can therefore no longer be satisfied. As a result, rents are comparatively high, at INR 150 per sf. and month, and new office blocks are being built on the outskirts in the south of the metropolitan area and in peripheral districts.
New satellite office locations Immediately to the south of Delhi, Gurgaon was the first non- metropolitan location in which an international IT company (IBM) opened an office. Its far bigger supply of space and low office rents make it extremely attractive, a fact increasingly recognised by me- toos (Microsoft, Nortel, Samsung etc. ). Offices were followed by housing for the staff, giving rise to a satellite town with high-grade infrastructure that is also conveniently located for the international airport. The only hurdle is that the motorway to Delhi is not yet open.
Meanwhile, though, construction work can no longer keep up with demand growth and as reserves of space shrink, so office rents are beginning to climb in Gurgaon, too. But at roughly INR 40 per sf. and month, they are still way below the CBD level. The shortage of space in Gurgaon makes other out-of-town locations of interest as well. Noida and Greater Noida are to the east of Delhi; Noida is about 10 km from the city, and Greater Noida is being built another 20 km east of Noida. Both towns, like Gurgaon, are based on a master plan assigning individual districts specific purposes.
Whereas a large number of buildings are already complete in Noida, Greater Noida is still in the making. The infrastructure is already in place (expressway to Delhi), but work on offices and apartments is still in an early phase. As in Gurgaon, a new satellite town is being fashioned with office blocks, shopping malls and housing estates. The potential for expansion is enormous, and at around INR 35 per sf. and month office rents in Noida are still below those in Gurgaon. That said, even in Noida rents edged up in the course of 2005.
With demand in the Northern Capital Region still surging, new building construction in 2006 is estimated at 7. 5 million sf. , and hence should satisfy the additional demand anticipated. Limited reserves of space in Gurgaon are increasingly forcing price- conscious takers to Noida and Greater Noida. The satellites’ modern, premium-grade buildings and positive locational factors will presumably also absorb demand out of the CBD. High quality of office stock Office space gets scarce in Bangalore Vacancy rate (%, lhs), gross prime rent (INR per month, rhs) 850 7 645 5 440 3 235 1 030 2001 2002 2003 2004 2005
Vacancy ratePrime rent Source: JLL 17 Bangalore, the IT centre, reaches the limits of growth In the last few years Bangalore has developed as India’s IT centre and has since been coined India’s “Silicon Valley”. But even before that, the city was already an important location for being the centre for aerospace research. Today, nearly all well-known international IT firms are represented there. 16 However, the infrastructure of the city has not been able to keep pace with the rapid development of the IT market. Both the road network and the electricity and water supplies are overloaded.
Local public transport is provided only by buses, although an underground railway is being planned. For a city of this size and impetus, the airport is also much too small. A new airport is being built in the north of the urban area. The first phase should be opened in mid-2007. The office market has a total stock of around 28 million sf. , of which around 38% is in quality classes A and B. The office stock is therefore of considerably higher quality than those in Mumbai or Delhi. The first office buildings were constructed in the city centre (CBD) around Mahatma Gandhi Road.
As the demand for modern space has continually increased, new office locations have had to be developed in the south and east of the urban area. The main locations for the secondary centres (SBD) are Hosur Road, Whitefield and Airport Road. Despite its suburban location in the east, Whitefield is the second-best location after the CBD while the Ring Roads are recognised as important peripheral locations. In the last few years office demand has always risen faster than supply. Net absorption in 2005, around 7 million sf. , was almost unchanged from 2004 (7. 5 million sf. and was considerably higher than the volume of new development. In 2005 the volume of new development was around 6. 5 million sf. and was therefore less than net absorption. This means that the level of vacancy also fell somewhat in 2005. It is now well under 5%, even somewhat less than that in the CBD. Rents in the Bangalore CBD have risen considerably Rising rents are a result of the shortage of office space. Between the end of 2004 and the end of 2005, top rents in the CBD rose by about 10%, although the level of rents is still considerably lower than those in Mumbai or Delhi.
In the CBD, top rents for Class A buildings are up to INR 45 per sf. per month. Top rents in the SBD are around INR 38, while in the peripheral locations around INR 43. As tenants are predominantly looking for large and contiguous accommodation, and the city centre is close to a traffic collapse, rents in the periphery are only marginally less than in the CBD. Also, the ease of develop- ing space in the periphery allows for more stable rents there. Sites in central locations have soared considerably, so many developers are concentrating on peripheral locations.
Over 50% of the new space has been built in peripheral locations, while the CBD accounted for just roughly 15%. Many projects have been construct- ed in accordance with the requirements of their tenants, so-called “built to suit“. As a result, the majority of the buildings are fully let 16 Thomas Friedman described this very clearly in his introductory anecdote about a golf course in Bangalore, on which one can take aim at all the large IT firms in the surroundings (see Friedman, T. L. (2005). Improvement of Bangalore’s infrastructure is indispensable prerequisite Supply of office space is shifting from
CBD to second centres before completion. Many office properties are being built in business parks, as only they have sufficient development land available. The high level of development activity in the next few years (2006 and 2007 around 6 million sf. ) may not significantly ease the market if demand continues to increase as fast as it has in the last few years. Development activity in the CBD will continue to be low. Of course, the vacancy rate can hardly fall any further. In peripheral locations, where most of the offices will be completed in the next few years, it could even rise slightly in the medium term.
Top rents are expected to increase further during 2006 and 2007, stabilising only in the subsequent years. A moderation of the market may result from the development of the new airport in the north, as a new office location may be built in its surrounding area, which would take the pressure off the other submarkets. The greatest risk factor for Bangalore as a location is from the up- and-coming Tier II and Tier III cities which also aim to develop as IT centres. Wages in Chennai, Hyderabad, Ahmadabad and Kolkata are considerably lower than those in Bangalore.
In some cases rents are also 10% to 20% less. Bangalore’s success story has also prompted would-be emulators in China and Eastern Europe. SAP CEO Henning Kagermann reputedly stated that he would like to invest more in Eastern Europe and China and less in Bangalore due to sharply rising costs. 17 This by no means indicates that the good times for Bangalore are nearly over. Although competition with other Indian, Chinese and Eastern European IT outsourcing locations is growing, at least in the beginning, this will mainly affect the basic service areas.
Bangalore has now moved further up the supply chain. In December 2005, both Intel and Microsoft stated their intention to strengthen their development activities in Bangalore. In this respect Bangalore still has a unique selling proposition. How- ever, developments in the Tier II and Tier III cities will somewhat dampen medium-term growth possibilities for Bangalore. The improvement of the infrastructure has therefore become an indispensable prerequisite for Bangalore. Trends in the Indian office markets For the whole of India, three trends are likely to hold over the next few years.
First, office supply must increase considerably. In the three locations described, the office stock will have to increase by a total of nearly 20 million sf. annually in order to keep pace with the growing demand. Taking all the Indian cities having a population of over 1 million, nearly 55 million sf. must be completed each year. This could even prove to be a very conservative estimate. Not only have vacancy rates fallen in the last few years but the market for IT outsourcing is still far from exhausted. India is expected to gain above-average benefits from the further globalisation of services.
Second, the supply of space is shifting from the traditional CBDs towards secondary centres as a result of sharply higher land prices in the city centres. 18 Another reason is that modern office buildings in newly developed areas enable the higher quality standards that are essential for IT services. Tier II and Tier III cities may catch upThird, Tier II and Tier III cities may catch up, particularly in IT outsourcing. These cities are benefiting from the marked price increases in Tier I cities’ office markets. In Tier I cities prices have been rising faster than rents, which is not likely to end in the near future.
Initial yields will then fall further. While Delhi will remain the centre of government and administration, and Mumbai the financial centre of India, many locations (e. g. Chennai, Hyderabad) are striving to emulate the great success of Bangalore. They are not just outsourcing cities for Indian companies. Foreign companies are also becoming aware that India offers more than its three Tier I cities. This is why locational competition has become stiffer, particularly for Bangalore. Retail real estate: Traditional structures are breaking down Consumer spending rises INR tr 25 20 15 10 5 0 2001 2002 2003 2004 2005
FoodClothingHousing FurnitureHealthTransport RecreationMisc. Sources: MSPI, DB Research 18 Growing middle class m households by income group 120 An analysis by A. T. Kearney, the management consultancy, suggests that the Indian retail market has the largest growth potential of worldwide retail markets. 19 This is hardly surprising, taking into account the country’s impressive growth potential and positive demographic trend. In the next few years, the growing middle class in particular will provide stimuli for retailing: Today, 300 m people have an annual household income of at least
USD 2,000; 58 m people have more than USD 4,400 per household. It is also expected that purchasing power will increase considerably, particularly in the towns and cities. Even today, India, with a retail turnover of around USD 250 bn, is already one of the ten largest retail markets in the world. This is equivalent to about 50% of the total private expenditure on consumption and around a third of the total Indian GDP. Retailing is estimated to increase its share of the total number of employees from 8% to 10%. A. T. Kearney forecasts an annual growth in turnover of around 10% in the next few years.
Taking into account the high level of unfilled demand, all retail sectors will benefit from this upswing. However, there are serious differences in the growth rates of the various retail sectors. For the growing middle classes, the “event” character of shopping will become more important, i. e. retailing and “lifestyle” will become more closely linked and shopping for the basic needs will fall in relative importance. Around 45% of consumer expenses are still 1992-1993 1998-1999 2005-2006 (estimate) 100 80 60 40 20 0 incurred on groceries and clothing.
There will be qualitative shifts in this area and the relative weighting of necessities will fall. At the same time, convenience and luxury goods will rise in importance. As an example fast-moving consumer goods like cosmetics, which had a market volume of around USD 13. 1 bn in 2003, could treble their volume by 2010. 20 The end of protection for domestic retailers <=35 36-7071- 105 105- 140 >140 For many decades the government has protected local retailing from foreign competition. This is why the retail market and also the retail Annual incocme ‘000 INR
Sources: NCAER, DB Research 19 real estate market are still underdeveloped in comparison with the office market. The retail landscape is still characterised by owner- operated local shops, the so-called Kiranas, and by street markets. The vast majority of these shops have sales areas of considerably 19 See A. T. Kearney’s 2005 Global Retail Development Index (http://www. atkearney. com/main. taf? p=5,3,1,110). Structural changes on India’s retail market Turnover by retail category, tr INR 30 25 20 15 10 5 0 2004201020152025 Organised retail trade Unorganised retail trade ess than 500 sf. Euromonitor International estimates that nearly 80% of Indian retail undertakings are small family firms. Although there are also large domestic retail companies like Pantaloon Retail and Trent Ltd, the proportion of retail chains was only around 3% in 2004 and 96% of this organised retail is clustered in the ten biggest cities. 21 In the cities and in the new shopping centres there are also supermarkets (Foodworld) and Indian hypermarkets (Big Bazaar) as well as department stores (Pantaloons, Shoppers Stop). However, these have also not yet gained great market importance.
Another reason for this is that, until the beginning of 2006, foreign retailers were only allowed to open cash and carry markets or to market their products through franchisees or by licensing. Reebok, Nike, Levi’s and Benetton have already opened outlets. So has Metro, with its cash and carry markets, which also function as wholesalers. Up to now, the largest global retail chains such as Wal-Mart or Carrefour have not been allowed to open branches in India. From the beginning of 2006 the government has allowed direct foreign investment in retailing, with 51% participation.
This concerns retailers who market their brands Malls and more Source: Trent Ltd 20 under their own names. Further opening of the market appears likely in the next few years. As a result, retail chains could grow much more quickly than the traditional retailers. Trent Ltd expects an average growth in chain store retailing of over 16% p. a. until 2025. The turnover growth of traditional retailers could slow to around 4% p. a. , so the market share of the chain stores could increase to about 24% by 2025. Increasing international competition, particularly in food retailing, would then lead to falling consumer prices.
But not only international market entrants will enter the Indian retail market in the next few years. Increasingly, industrial conglomerates will try to grow into the retail sector. Even if the market does not open up further to foreign investors, the market structure will change towards organised retail formats. New shopping formats Shopping centres have only been built in the last few years, starting in the major cities, as a result of the high demand for modern retail Number and mall space in 2008 | Number of malls| gross leasable area (m sf. )| Delhi| 96| 23. 5| Mumbai| 55| 16. 2| Bangalore| 14| 8. 0| Chennai| 6| 2. 5|
Kolkata| 10| 3. 2| Hyderabad| 12| 4. 2| Pune| 19| 5. 6| Ahmadabad| 7| 2. 7| Source: Trent Ltd 21 space. Since then they are also to be found in many other cities. As there is only limited space for large-scale retailing in the city downtown areas, the new and modern shopping centres are mainly being constructed in the suburbs. These are similar to Western centres in construction and impression – however in most cases not at the same quality standard. In the meantime a real boom in shopping centres has set in. There are currently around 100 shopping centres in India – half of them in the conurbations of Delhi and Mumbai.
And this is only the start of their development. 22 Trent Ltd shows that, by the end of 2008, just in the eight largest Indian cities23, a total of 66 million sf. of new shopping centre space could be constructed in a total of 219 centres. In the seven next- largest cities (including Jaipur, Kochi and Mangalore) around 38 centres with about 13 million sf. of retail space are planned by the end of 2008. Rising predatory competition in some locations Retail offers enormous potential No risk of a countrywide oversupply of retail or mall space Average household size falls slowly but steadily
Population, m (rhs), persons per household (lhs) In some locations supply might rise faster than demand, as a result of rising predatory competition. This could occur shortly in the suburbs of the larger cities. For example, in Gurgaon near Delhi, in addition to the existing six shopping centres in the Mall Mile, a further 17 are planned. These locations are intended to cater to the middle- and upper-middle classes, so that they can shop near to where they live. Locations that are currently well-accepted could also suffer from competition in the future, from new sales formats in tram and underground stations.
The city downtown areas are already in competition with the (out-of-town) shopping centres, as it is hardly possible to realise new layout concepts in existing buildings. In addition to shopping centres, increasing numbers of hypermarkets are being built. As a result of growth potential in the grocery sector, the supply should increase substantially. Foreign retailers like Wal-Mart, Carrefour and Tesco are particularly likely to be active in this sector as soon as the investment regulations are relaxed. High opportunities for growth In general, Indian retailing offers enormous potential.
However, the growth rate of retail sales might be negatively affected by government reservations against foreign retailers. In most cases, these reservations are not justified, as international retailers could offer a bigger variety of products than traditional retailers. They would to a large degree complement, and not replace, the existing retail supply. For example, China’s experience of opening its gates to foreign competitors ten years ago is quite telling. Since then, not only has retail turnover accelerated by about 15% p. a. , but also traditional formats increased over time. 4 Of course, the shift in demand will mean that traditional retailing will be weakened – but only in relative terms. Additionally, more foreign direct investment into retail would increase the number of potential tenants in the new malls. One of the main challenges for Indian malls will be finding an interesting mix of tenants. More international retailers would ease the risk of vacant mall space. Because of the anticipated shifts in consumer demand to con- venience and luxury goods, the entry of foreign retailers would give rise to the establishment of malls and hypermarkets.
As, at the moment, extensive amounts of new space are being developed in many cities, new projects should be subject to a fundamental market analysis. Future demand and supply trends in the specific region must be carefully analysed before investing. It should also be taken into account that regional growth of the retail sector could be limited by too slow progress in modernising the infrastructure. This is now 5. 9 5. 8 5. 7 5. 6 5. 5 5. 4 5. 3 Population (rhs) Average household size (lhs) 1,200 1,050 900 750 600 450 300 relevant not just for the major cities but also for some Tier II and Tier III cities.
However, we do not believe that India has an oversupply of retail or mall space. Housing market set for strong growth 20 to 30 million housing units short at present The key drivers of housing demand are disposable incomes, 1970 1977 1984 1991 1998 2005 Sources: Census of India, UN Habitat, DB Research 22 financing terms and population development. The latter, however, has only an indirect impact, because demand on the housing markets is generated by households rather than the absolute Only 50% of all households live in good dwellings Households by quality of dwelling Dilapidated 5% Good 51% Livable 44%
Number of households: 192 m Source: Census of India, 2001 23 Most Indians live in small housing units Number of rooms per household Five rooms and aboveNo exclusive rooms number of inhabitants. The last census survey in 2001 reported roughly 192 million households in India, about 40 million more than ten years earlier. The number of households has thus risen slightly faster than the number of inhabitants. This means average house- hold sizes are decreasing a little, although at roughly 5. 4 persons per household they are still extremely high (in Eastern Europe for example there are roughly 3 persons per household, in est European countries not even 2. 4). The 1970 statistic of 5. 7 persons per household was only marginally higher. Interestingly, urban household sizes are scarcely lower than those in rural areas. In developed countries households in cities are normally considerably smaller than in rural regions. The similarity in Indian household sizes could suggest that family structures also play an important part in the cities. What is more, the scarcity of urban housing presumably makes larger households a necessity. Between 1991 and 2001 the number of housing units grew by about 54 million. 5 At the same time the quality of the housing stock was improved. The number of households living in cramped conditions dropped appreciably, and the accommodation was better equipped. In the cities the home ownership rate rose from 63% to 67% and in the country by one percentage point to 95%. Even so, the situation on the Indian housing markets has not yet Four rooms Three rooms Two rooms One room eased sufficiently. In the 2001 census the number of households still outstripped the number of housing units by almost 5 million, with roughly a third of housing demand in urban centres.
The overall backlog of demand in the housing market is probably much higher still, given that more than 5% of households live in derelict accommodation. Only half the housing stock in 2001 was deemed adequate, a figure that did at least rise to nearly two-thirds in the cities. Nonetheless, many people still live in very cramped conditions: 70% of households have no more than two rooms, and 24 Number of households in India: 192 m Source: Census of India, 2001 Forecast average household sizes To assess how average household sizes might develop in India, we have estimated simple cross-section regression models.
These comprise available data of 27 countries, (mainly industrialised, but also transforming economies). The explanatory variable is the average household size in 2003 and the main exogenous variable is fertility in 1985. We would of course expect to see a plus sign, because most children will probably still be living with their parents. Also factored into the various models are per capita GDP, the degree of urbanity and life expectancy. It is to be expected that house- hold sizes will decrease with declining fertility, rising incomes, bigger urban populations and higher life expectancy.
The models deliver a significant drop in household sizes for the coming 30 years. Households could shrink from 5. 4 persons at present to between 3. 7 and 4. 7 persons. By comparison, today a good 4 people live in one household in Mexico, not quite 3 in Poland or Spain and only about two in Germany. over 40% of even very large households with more than nine members live in two rooms at the most. The National Building Organisation estimates pent-up housing demand at around 20 million units; the Ministry of Urban Employment and Poverty Alleviation even puts catch-up at a good 31 million housing units. 4 million of these are needed in rural areas and somewhat more than 7 million in urban centres. 26 Massive future demand India possesses the elements of very strong demand growth on the housing market in the coming decades. In a very conservative (and unlikely) scenario in which the average household size remains constant at the present-day level, the backlog of demand cannot be unwound and no shifts in quality take place, each year some 4. 7 million housing units would have to be completed up to 2030. This figure is based on additional demand of roughly 2. million housing units and annual replacement demand of roughly 2 million dwellings. 27 25 Ministry of Urban Employment and Poverty Alleviation (2005). National housing and habitat policy, New Delhi. 26 For a discussion of possible ways to work off the bottlenecks see, for example, Mahadeva, M. (2004). 6. 9| 2. 8| 1. 2 2. 812| 2. 7| | | | Demand for new housing Million new housing units 2005-2030, p. a. Drivers Total Smaller households Supply gap Replacement Population growth 0246810 Source: DB Research 25 Houses are still affordable despite rising prices 995=100 It is, however, very likely that the average household size will continue to shrink in the coming years, as sustained economic growth enables more and more young people to make a home of their own. The trend towards fewer children is ongoing. Continued progress in urbanisation will likely result in smaller household sizes. Our estimate models (see box) suggest that in 2030 an average Indian household could consist of only 3. 7 to 4. 7 persons. In that case, between 5. 9 and 8. 7 million dwellings, including replacement demand, would have to be built each year.
Factoring the present supply gap of 20 to 30 million housing units into this equation, another million dwellings would need to be completed each year to achieve equilibrium on the housing market by 2030. In addition to this strong volume growth, rising incomes will also alter the quality of demand. According to analyses by the National Council of Applied Economic Research, the number of households in the lowest income bracket dropped by around 20 million from 1992/1993 to 1998/1999. In all other income groups household numbers climbed, the strongest percentage increase being registered in the group with the highest incomes. 8 Given that this development was even more marked in the late 1990s than in the mid-90s, the trend towards a broader middle class can be assumed to have continued unchecked since then. The upshot is increasing bottlenecks in better-quality and premium housing. This could refer to living space, the number of rooms and the basic facilities. It should not be forgotten that although the rate of growth was strongest in the highest income bracket, the most rapid volume growth in absolute terms is taking place in the second-lowest income bracket. Price trends in major cities
The housing markets have picked up considerably in recent years. Powerful demand stimuli have caused shortages in almost all cities, pushing up residential property prices. On the supply side, too, steep rises in energy prices and, more importantly, accelerating land 1995 1997 1999 2001 2003 2005 House prices in Mumbai Affordability index The affordability index is calculated as the average 120 100 80 60 40 20 0 prices are fuelling the cost of property. In the ten most important cities, residential property prices jumped by around 25% in 2005.
In popular districts, the growth rate over the past 24 months has climbed more sharply still. In some parts of Ghaziabad (such as Indirapuram or Vaishali) in the north-east of Delhi, for example, house prices have doubled since 2003. But these substantial price increases do not automatically impose heavier burdens on households. For one thing, incomes for highly skilled employees have soared. In addition, financing rates are still well below their 1990s highs. A simple affordability index, calculating the average cost of financing a property in Mumbai, for example, relative to the net domestic product in Maharashtra, signals that ortgage payment for a 25-year down payment for an average sized flat in Mumbai over per-capita-NDP in Maharashtra. Sources: HDFC, RBI, DB Research 26 while homes are not as affordable as two years ago, there is still no exaggeration as in the mid-1990s. For the most part, incomes and low mortgage rates justify the current price level. Moreover, tax incentives have been granted to finance property. Nowadays higher interest and debt service can be claimed against taxes than in the 1990s. Underdeveloped mortgage market Mortgage debt as % share of GDP, last available data
IN TH KR MY SG TW DE HK US GB DK 020406080 Sources: RBI, EMF, Eurostat 27 Lending volume increases March 2003 = 100 An eye to the opportunities, regard for the risks Notwithstanding, the market is not without its risks. The Reserve Bank of India has regularly made clear reference to the strongly expanding market for property loans (housing and industrial property) as part of the reason for raising its key policy rates recently, and remaining on a tightening bias. Since September 2004 the refinancing rate (repo rate) has been lifted by a total of 100 basis points to 5. % at present. The reverse repo rate, to which many variable interest rates are pegged, has also been hiked to 6. 5%, up 50 basis points since the end of 2005. And since July 2005 property loans have had to be backed by slightly more equity. The risk weight on mortgages was raised from 100 bp to 125 bp. On the whole lending terms for banks have thus been tightened up. Another factor is the scarcity of building land near big cities, reflect- ed in surging land prices. This makes it increasingly worthwhile to consider locating investment projects in Tier II or even Tier III cities.
International investors must also bear in mind the three-year lock-in period for property investments, making them less flexible in their strategic focus. Even so, the growth opportunities on the Indian housing markets are enormous. We do not yet see house prices at their peak. Precisely because demand is driven by households’ real needs, the develop- 03040506 Gross bank credit Housing Other real estate 320 280 240 200 160 120 80 ment so far remains healthy on a national scale. This, however, does not rule out price overshooting in some pockets of the country. Indian real estate capital market
India’s total commercial real estate stock and the investible stock In order to evaluate and compare the opportunities and risks of India’s various real estate markets it is necessary to have at least a broad picture of their investment potential, i. e. the size of the Source: RBI 28 Real estate investment market: Potential for growth Total and investible stock, USD bn (lhs) respective markets. This is not an easy task, however, given the difficulty in obtaining reliable data on global real estate markets and, in particular, real estate in emerging markets. 29 The following section describes the Indian real estate capital 500 2000 1500 1000 500 0 INKRCNJP 70% 60% 50% 40% 30% 20% 10% 0% markets in terms of three categories: — Total stock: The overall stock of commercial real estate. — Investible stock: Inv