Real estate investment is driven by job creation, infrastructure and economic growth. The past decade has seen the services sector accounting for 57 per cent of gross domestic product. It grew at a compound annual growth rate of 8.5 per cent between 2000/01 and 2013/14. This led to higher job growth and higher income profile. Growth of the real estate sector also depends on development of infrastructure such as road and rail networks, and metro connectivity. Social infrastructure, such as schools, colleges, hospitality, retail centres and health-care facilities, also drives growth of the residential real estate segment.
The expectations of home buyers also depend on the development of a city. In metros, those working in the services sectors, such as IT/ITeS, financial services, banking, telecom and insurance sectors, are exposed to global standards in housing. They expect advanced features, such as energy-efficient or green homes, and are ready to pay a premium for them. For non-metros the focus of the home buyer is on getting value for money.
The pace of urbanisation will gather pace as the government unveils its 'smart cities' initiative. Most smart cities will be built around existing Tier-II cities that are manufacturing hubs or state capitals. Administrative capabilities, and political and social environments in such cities will have a strong impact on the growth of smart cities. As the new cities are expected to integrate commercial and residential sectors, it will improve the quality of life and might become an alternative to metros.
However, for non-metros, the size and scale of real estate development will be on a smaller scale. The preference for smaller independent houses will lead to more horizontal spread than vertical high-rise structures. In such a scenario, investments in land and plot developments are attractive and provide good returns. However, one has to ensure accurate land titles and physical monitoring of the property to avoid encroachment.
The growth of non-metros would primarily depend on job creation. The commercial office space is still at a nascent stage and, therefore, rental yields are very low to attract investments. High-street retail in central business districts of non-metros offers investment opportunities because of its business potential and availability of limited space. However, the size of the opportunity is limited due to inadequate infrastructure that leads to high values of existing properties.
Investment opportunities in non-metros will be driven by their planning and execution capabilities, regulatory environments and economic incentives. The growth of these cities is expected to happen over medium- to long-term because developers have smaller scale, lack of professional organisation and limited capability to adopt new technology. This coupled with higher cost of capital and limited capital may further hinder growth of real estate in non-metros.
In metros, real estate development provides options for diversification. It offers choice of size, quality and brand. The impact of the overall economic growth benefits metros due to established infrastructure and existing job markets. Metros provide better options for both investments and exits because the ecology is developed and developers are more professionally organised with technical and financial capabilities.
In metros, income-yielding Grade-A commercial properties have seen rental yields bottoming out and current capital values provide counter-cyclical opportunities for investment. Luxury residential real estate with distressed value looks good as a self-owned home than an investment opportunity. Mid-income and upwardly-mobile mid-income-focused homes are mostly in demand and sales velocity exist in this segment. But incentives schemes need to be evaluated to ensure best-value deals.
Developers are saddled with high debt on their balance sheets and slowing sales. This has also affected the pace of project execution and, therefore, offers value-buying opportunities. At the same time, improving economic growth could result into interest rate reductions for the home buyer. Rising income and job growth could result in pick up in absorption. This provided value-investors and end-users to lock in their investments. Similarly in commercial real estate Grade-A property provides opportunity for investment. This window of opportunity is expected to be available in the current year as conditions favourable for real estate become visible.
BOOM & BUST: The Indian Story
Growth of real estate in the country gained pace between 2003 and 2008 when the Indian economy was growing at around eight per cent. Many real estate developers and investors ventured into nonmetros as growth opportunities seemed attractive in these Tier-I and Tier-II cities in the initial phase. Many metro-based developers tried to expand to non-metros, such as Pune, Jaipur, Mohali, Indore, Nagpur, Kochi and Coimbatore, among others. However, following the global fi nancial crisis, India's growth slowed down considerably, and execution of both residential and commercial projects, demand for them and exits from such projects proved to be a major challenge.
(The author is Managing Director & CEO, ASK Group)