More Indians will be able to afford homes
The Modi government recognizes the importance of real estate development to the economy and has made a slew of announcements that will benefit the sector
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Don’t let the current chatter fool you: The long-term outlook for the Indian real estate sector is bright. Urbanization, demographic changes and improving affordability will drive growth over the next decade. Nearly five million Indians move into urban areas every year. Families are increasingly choosing to live in nuclear family units with dual incomes, thereby increasing each family’s disposable income, and the demand for housing. Already, in the past decade these demographic changes, along with others, have pushed the average age of a first-time homebuyer down by more than 10 years, to about 30. In the coming decade, GDP (gross domestic product) growth, and the resulting income growth, combined with an improving mortgage-to-GDP ratio and lower interest rates, will make property prices more affordable for a larger number of Indians.
A recent Morgan Stanley report predicted a 16% compounded annual growth rate in the real estate sector over the next decade. The analysis drew a comparison between China in 2004 and India in 2015—when the countries’ economies were very similar on many important economic indicators. In China, the value of real estate sold between 2004 and 2015 grew at 22% annually and created a property sector worth $1.3 trillion (around Rs88 trillion) in 2015. Compare this to the estimated 2015 size of $105 billion for the Indian property sector, which Morgan Stanley estimates will cross $500 billion over the next decade.
The government has a big role to play in setting a policy agenda that promotes both consumer protection as well as industry growth. Real estate development should be a priority for the government for several reasons. First, construction is the second largest employment generator, behind only agriculture. Second, the sector is a major contributor to the economy directly, and through ancillary industries such as cement, steel and paints. Third, there is an acute housing crisis in the country, with inadequate housing and large segments of urban India living in slums. Lastly, the property sector is a major revenue source for the government and can drive funding for significant infrastructure requirements.
The Narendra Modi government recognizes the importance of real estate development to the economy and has made a slew of announcements that will benefit the sector. These include the aspirational Housing for All by 2022 policy and the 100 Smart Cities initiative. The recent Union budget confirmed this focus as the government announced numerous policy changes to support the affordably housing industry. The government has also changed the regulations governing real estate investment trusts (Reits) and foreign direct investment to promote greater liquidity. It has also taken important steps to improve governance levels with the Real Estate Regulation and Development Act (Rera), which will ensure that homebuyers are protected and that the sector gains more credibility. While Rera and demonetization have arguably created an adverse short-term impact, they will ultimately bring about greater accountability, transparency and professionalism, and will thereby set the stage for the sector’s long-term growth. The government has also laid emphasis on improving the ease of doing business in India in an effort to unleash the true potential of the economy. The ease of doing business in the real estate sector is, to put it politely, non-existent, which leads to several adverse outcomes, including project delays, reducing the affordability of real estate.
I believe we will start seeing the next uptrend in 2017. In the past three years, real estate prices have been stagnant, interest rates have declined, and consumer incomes have grown. The cumulative effect of these changes has significantly improved affordability. Real estate is an expensive proposition that creates long-term financial value for those Indians fortunate enough to be homeowners, but buyers are typically pessimistic about the short-term outlook, always hoping for better deals around the corner. Given the underlying reality of land being a scarce resource and costs steadily increasing, those better deals rarely come to pass.
I’m reminded of an anecdote: Fifty years after my parents bought their first apartment, they sold it for almost 1,000 times the price they had paid. But the most remarkable part of the story is that a senior manager at our group told me that at the time, all the managers thought my parents were vastly overpaying! I think the coming decade will bring many positive surprises in terms of the pace of growth of the industry and the leading developers within the industry. I hope to see the quality of design, construction and customer service keep pace with the rapid changes in scale, so that the industry becomes one that homebuyers, government and developers can be proud of in the years ahead.
Pirojsha Godrej is the managing director and CEO of Godrej Properties Ltd.
This is part of a series of articles in Mint’s 10th anniversary special issue that look at India 10 years from now. The entire list of articles can be found here