Centres of growth for property market players in India

ABHISHEK GUPTA highlights some of the centres of growth for property market players

India’s property sector has been on a high-growth curve since the beginning of this decade, in line with the country’s average growth in real GDP over the last six years of 7.1 per cent.

According to government estimates, gross domestic product is expected to grow more strongly at 9.2 per cent in FY07. The service sector maintained its growth momentum and grew by 140 basis points over the last year, accounting for more than 55 per cent of last year’s GDP.

The current economic and business environment reflects stability while the stage is set for furthering the growth story.

The property sector, too, has made significant additions to the economy’s growth while, at the same time, being driven by it. The traditional growth centres (Tier I cities) have grown from strength to strength while the Tier II and III cities are fast emerging as hotspots for the office, retail, residential and hospitality sectors.

Delhi, Mumbai and Bangalore have been the traditional growth centres, and have been the first choice for new entrants as well as established players in the market. Delhi is the political capital of India while Mumbai has been the financial capital. Both cities are rich in heritage and culture and have been centres of trade and commerce historically. Bangalore, which was known as the ‘Garden City’ of India, developed into the IT capital of India from 1990 onwards.

All three cities have the highest international profiles and have attracted a significant proportion of foreign direct investment (FDI). These cities also have the largest and most qualified labour pools, strong infrastructure, advanced real estate formats and the highest real estate stock in the country.

Tier II cities of Hyderabad, Pune, Chennai and Kolkata also joined the real estate bandwagon last year. As the familiarity with India as a business location grew, more and more domestic and foreign firms began considering Tier II cities for their expansion plans or entry point into India.

These cities are proving to be highly attractive locations due to their competitive business environments, human resources availability, telecommunications connectivity, quality of urban infrastructure, transparency of governance and availability of cheaper real estate.

These cities are major centres of IT, IT enabled services (ITES) and biotech activities and are increasingly on the radar of major domestic and foreign retail players. This, in turn, is spurring the growth of organised retailing units like malls, supermarkets, hypermarkets, etc. In addition to this, some of the largest and most high-profile developments by cross-border developers are being considered in Tier II cities.

In addition to the Tier II cities, Tier III cities of Kochi, Mysore, Nagpur, Chandigarh, Indore and Jaipur, to name a few, are gaining prominence and more and more firms are beginning to evaluate the viability of locating there. IT firms like Wipro, Satyam, Infosys, IBM, Microsoft and Dell already have a presence in many Tier III cities across India. Prime examples are the Infosys state-of-the-art training centre and campus in Mysore and Bhubaneshwar respectively and the Genpact facility in Jaipur.

Driven by the phenomenal service sector growth, office demand grew exponentially in terms of volume and quality. The typical operational requirements of the IT/ITES/BPO players are large floor plates, buildings with 24-hour power back-up and superb connectivity in terms of telecoms support, to name a few.

Currently, in the seven major cities of the country, a cumulative 125 million sq ft of Grade A and B stock exists. The vacancy in the various micro markets of these cities varies between zero and 14 per cent. As per the present estimates, 77 million sq ft of space is expected to be added to existing office space across these cities in 2007.

Driven by the growth in the services sector and overall economy, aspirations and disposable incomes of people have also risen. Retailing in India witnessed a turnover of US$320 billion in 2006. Although this figure is low compared with other developed economies, industry experts peg the sector’s growth rate at 35 per cent until 2010.

The government has allowed foreign retailers to own up to 51 per cent in a single-brand retail company. The preferred route for multi-brand retailers is forming a joint venture with an Indian partner such as the recent tie-up between Wal-Mart Stores Inc and Bharti Enterprises. Additionally, large Indian conglomerates such as Reliance Industries and Aditya Birla Group are kicking off their foray into retailing across the country.

Currently, about 160 malls are operational at a pan-India level with a total area of 30 million sq ft. As per the current estimates, about 300 additional malls are expected to be constructed across the country by 2010.

India is currently facing a shortage of 20 million residential units. Though this shortage is primarily in lower income group (LIG) housing, the demand for middle income group (MIG) and high income group (HIG) housing has increased in tandem with the rise in income levels and ease of home loan availability.

The major international developers who are in the fray of residential developments are Keppel Land, Emaar and the Salim Group, to name a few. Joint ventures between global investors, developers and local players for the development of integrated townships is getting increasingly common.

The government has initiated the process to make the economic and business climate of India a conducive one. It allowed FDI in the construction sector in February 2005, put in place various incentives for the IT/ITES sector and a number of other measures. The most recent has been the initiative to set up a number of special economic zones in the country.

To conclude, though the Indian real estate sector is nascent, it is already on fast track by virtue of its geographical and sectorial hotspots. The writer is senior manager of research at Jones Lang LaSalle
India

Source: The Business Times, 10 April 2007