India real estate: can FDI save the day?

Investment in India’s real estate sector is falling fast – yet another bit of bad news for the economy.

In the fiscal year just ended, new investment into real estate was down 55 per cent from Rs926bn to Rs420bn (from $18bn to $8bn) according to the Associated Chambers of Commerce and Industry of India (Assocham).

The sector is suffering as sales fall, the cost of construction rises and banks refuse to pass on reductions in the base rate after the recent round of interest rate cuts.

But Anurag Mathur, head of emerging business at Jones Lang LaSalle India, told beyondbrics this isn’t a bursting bubble. Mortgage rates are still low and supply is short in the residential segment; vacancy rates are low in commercial property and prices aren’t actually falling.

Mathur continued: “The retail segment is a little slow. But that’s because organised retail is still in its early stages here, so there is a whole lot of learning and discovery to be done and this is a natural period of settlement. In commercial property too, demand is not high but vacancy rates are low. This is a peculiar market where the developers can tweak supply on tap, so if demand is slowing they just turn down the supply.”

There are also some exceptions to Assocham’s findings. Gujarat, a state lauded for its investor-friendly regulations and booming economy, is one region bucking the trend. Some 41 per cent of the new investment into India’s real estate sector last year came in this state alone.

“Gujarat has seen a surge of over 700 per cent as the state has attracted investments worth over Rs17,000 crore ($3bn) as of March 2013 from just over Rs2,000 crore ($370m) a year ago,” commented DS Rawat, national secretary general of Assocham.

Any optimism for a pick up in investment hinges on economic liberalisation – the very factor driving the economy in Gujarat. Rawat has pinned his hopes on the approval of foreign investment in multibrand retail to attract investment in commercial real estate.

And in its recent report, Jones Lang La Salle and the Confederation of Indian Industry also suggested that a relaxation in FDI regulations would provide a solution, allowing foreign investors to put money into India’s property market and to exit easily too. As bank credit is expensive in India this capital intensive industry needs foreign funds, as well as the exposure to competition and know-how that foreign investment brings.

Mathur too sees those abroad as providing the solution. He suggests that new investments could rise if the US and European economies recover. Multinationals can have a significant influence on India’s commercial real estate market and if their home markets improve they will step up investment in their Indian businesses.

“Everything changed very quickly in 2010 with lots of activity in the second quarter, so it could change quickly in 2013 too”, he said.

But if it is market sentiment that is holding back investment, any recovery hinges on the economic and political environment – both of which remain unpredictable as the global economy remains wobbly and the Indian elections creep nearer.

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