Investing in Real Estate and Leisure in India

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Investing in Real Estate And Leisure In India

Real Estate sector in India is booming as demand for offices, residential

properties and retail is surging.

This is due to a number of factors including favorable demographics,

increasing purchasing power, and interesting financing, with tax incentives

granted to finance property, in addition to reforms initiated by the government

to attract global companies.

All this is leading to huge amount of foreign direct investments being

channeled to India, and is intensified by high liquidity worldwide, due to a long

period of loose monetary policy (low interest rate)

Funds are also attracted by high return of around 20-25% on real estate

investments.

Indian real estate market values now are appreciating 30% annually, and total

market value is projected to leap from US$16 billion in 2006 to over US$60

billion by 20101.

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Favorable Demographics

India has a young rapidly expanding population of 1.1 billion, with fast growing

income per capita, which is the most important factor behind the boom in

demand.

In addition to the population increase, less than two third of the housing

stock is deemed adequate, which leaves lots of potential for replacements in

housing.

It is thought that 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 4.8 million housing units would have to be completed up to

2030

It is, however, very likely that the average household size will continue to

shrink in the coming years leading to more demand on housing units.

This is mainly due younger Indians' desire and ability to live outside extended-

family homes.

Rising incomes will also alter the quality of demand which means more

spending on housing per person.

Another positive aspect of demographics is the return of Non-Resident

Indians (NRI) to the country, in line with the outsourcing of high-end jobs to

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India, which is fuelling quality demand for both residential housing and offices.

This, together with the increase in size of millionaires India (about a million),

explains why the highest rate of growth is being achieved in the highest

income bracket.

However it should be noted that the most rapid volume growth in absolute

terms is taking place in the second-lowest income bracket.

Demographics Trends And Real Estate Segments

The United Nations Population Division (UNDP) estimates a 2.5% per annum

increase in the population of the Indian cities in the next 25 years which will

lead it to double by 2030.

There are two clear outcomes to this:

India's cities must gear up to a dramatic increase in size. First, their

infrastructure (schools, roads, airports, seaports etc.) and housing capacities

will need to expand massively, opening prospect of huge investments in these

areas.

Second, the accelerated rate in urbanization 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.

Tier I cities comprises the capital Delhi, the financial centre Mumbai and the

IT hub Bangalore.

Tier II consists of the other cities targeted by companies as alternative off-

shoring destinations and now possess a well-trained pool of labor.

The cost advantage of Tier II cities over those in Tier I is estimated at 15 to

20%.

Given the rising costs in Tier II cities in recent years, companies are

increasingly eyeing Tier III cities which should lead to an increase in demand

in both offices and residence.

These are cities with populations of more than a million but are not yet

completely established as outsourcing and off-shoring destinations. They

represent huge investments opportunities.

However prime markets should still perform better than mainstream markets,

but the growth in 2007 will be lower than the previous year

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