India’s economy is booming, and real estate is one of its fastest growing sectors. Market analysis states that yields from real estate in India average between 10% and 12% a year, with a tremendous upsurge in commercial real estate on account of the Indian business process outsourcing (BPO) boom.

“Lease rentals and occupancies have been picking up steadily and there is a gaping demand for quality infrastructure,” says Rajarshi Datta, senior manager for DTZ Research India. Significant demand is also likely to be generated as the outsourcing boom moves into the manufacturing sector. DTZ research also shows the housing sector has been growing on average at 34% annually, while last year the hospitality industry grew by 10% to 15%.

IT drive

The information technology and IT-enabled services (IT/ITES) industry, the main driver for commercial real estate demand throughout India, has grown at a 36% compound annual growth rate (CAGR) in the past decade. By 2008, it is expected to account for more than 7% of India’s gross domestic product and 30% of foreign exchange inflows, creating more than 2 million jobs. In 2005 alone, the IT/ITES sector absorbed a total of approximately 2.7 million square metres across India. This sector is expected to continue to show robust growth for the foreseeable future.

Increasing urbanisation and demand for better quality real estate is fuelling demand for residential properties. Low per-capita housing stock, higher disposable income, the falling age of first-time homebuyers and all-time low interest rates coupled with surging home loans have contributed significantly to the boom.

The government now allows 100% inward investment in townships, housing, built-up infrastructure and construction development projects, subject to certain guidelines.

“The decision to liberalise FDI norms in the construction development sector was perhaps the most significant economic policy decision taken by the government last year,” says Mr Datta.

The market could evolve further with the advent of real estate investment trusts (REITs). These are currently non-existent in India, but in the past few years real estate and mutual fund representatives have asked the Securities Exchange Board of India (SEBI) to permit setting-up of REITs.

Consequently, SEBI has appointed a committee that has recommended that REITs should be implemented in India through mutual fund schemes. The committee’s report is pending, but SEBI opened a window for such investment in April 2004 under the venture capital fund and the foreign venture capital investor regime.

Although the initial real estate boom was concentrated in places such as Bangalore and the national capital region of Delhi (including Gurgaon), demand has spread substantially outward. Southern states and the capital area continue to attract the majority of IT/ITES and BPO investments, but secondary cities such as Chandigarh, Indore, Kochi and Kolkata are now emerging as destinations due to their cost and infrastructure advantages.

Long commitment

“The fact that foreign investors are willing to commit billions of dollars in this sector, coupled with their understanding that real estate investment requires a longer-term commitment, demonstrates the growing confidence of investors in the Indian economy,” says Mr Datta.

If channelled properly, the Indian real estate sector could stimulate the growth of several other sectors in the country through its backward and forward linkages.