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Why India is the best investment destination in the world?

Indian real estate summary

Indian real estate market is growing at a rapid pace on the back of improved real estate prices and sustained demand from end users as well as investors.

High economic growth, favorable demographic and socio-economic factors have led to a sharp rise in demand for housing and commercial real estate. Unlike most markets, multiple themes are playing out at the same time in India.

India is estimated to experience a demand supply gap of 17.9mn housing units by 2010. This apart, commercial real estate demand is expected to be around 350mn sq ft out of which IT/ITES and organized retailing sector should contribute around 300mn sq ft.

Sensing this huge opportunity, the market has seen increased interest following the FDI relaxation and government’s SEZ policy.

The major demand drivers in an economy are:

Favorable Demographic and socio-economic factors

Population growth and inward migration through increased employment have been the drivers of world’s best real estate markets. Strong economic growth, huge population, large skilled workforce, growing employment, and increasing purchasing power has kick started the growth in real estate market in India.

IT/ITES sector – India acting as world’s back office

India’s competitive cost advantage has seen the country being dubbed as the world’s back office. The sector is expected to grow at a CAGR (Compounded annual growth rate) of 25-30% over the next five years, which would create an incremental demand for 150mn sq. ft of commercial space by 2010.

Housing – Demand far outweighing supply

With approximately 210mn households in 2005, India had a housing shortage of 19.8mn units. It is expected that the households will rise to 235mn by 2010 and 294mn by 2020. We estimate supply would have to grow by 3% to meet 100% demand.

This is higher than the growth rate witnessed in the past 4 decades. Complementing this, the sector is witnessing a renewed demand for premium housing leading to stronger prices.

Organized retailing – Still at the tip of the iceberg

With organized retailing forming only 3% of the total retail pie, India is far behind its Asian peers. We estimate this share to go up to 11% by 2010 there by creating a demand of 150mn sq ft for mall space. Only 75mn sq ft is being added by 2007, leaving ample room for growth.

Hospitality – unbounded growth

Foreign tourist arrivals have shown a 15% CAGR over the past two years. WTO expects this to grow at 8.8% annually over the next 10 years. This coupled with a 25% growth in domestic air passenger traffic has kept hotel industry Average Room Rental (ARR) and Occupancy Rates (OR) high.

The country is currently facing a supply crunch of 27,000 rooms in 5-4-3 star categories. 2250 room capacity is coming up in the premium segment alone over 2006-2011.

SEZ – Mad rush for the Oasis.

Government’s push for setting up SEZ’s to emulate the China growth story has been well received by the industry. Favorable government policies and fiscal incentives have lured corporates to develop SEZs. 150 proposals have received formal approval, while 117 other proposals have received in principle approvals.

While the development potential of SEZ cannot be doubted as seen from international experience, many quarters in the government have expressed their concerns on the possible revenue loss to the government. On a more micro note, SEZ development is expected to be cash flow negative for the developers in the initial 3-4 years, however, we remain positive on the long term benefits.

Since 2004 most companies have reported astronomical growth in profitability on the back of rising property prices. Our interaction with the managements induces us to think that the growth is set to continue in the future as well.

Companies have lined up projects, which are more than 2-3 times the size they have completed in the past 5 years.

India – Nascent market with huge potential

The Indian real estate market size of mere US$15bn(2005) and limited institutional participation does not truly reflect the future potential of the market.

The industry is growing at a 33% CAGR to touch US$50bn by 2010. Strong economic growth, favourable demographic changes, fiscal benefits, lower interest rates and improving institutional framework have helped the industry grow rapidly over the last 2-3 years.

While there are no proper estimates, the industry is estimated to have grown at 35% annually in 2007. Government has also shown keen interest in developing the sector by relaxing FDI norms, allowing market participants to access foreign capital.

India demand drivers - Size, Youth, Aspiration and Prosperity. Size does matter!

India has made rapid progress over the past 15 years since liberalizing the economy in 1991. While the policy process has been slow, it has helped the growth to take a steady course, which is seen in the 6.4% CAGR since 2001.

Unlike most Asian economies, which have prospered on the manufacturing front, India has grown on the back of a robust services sector contributing 54% of the total GDP.

India and China are expected to be the world economy’s growth engines over the next few decades and McKinsey estimates India to be the third largest country by GDP in 2050 (Purchasing power parity). While the time horizon of this comparison might be long, the country has been moving in the right direction.

Burgeoning population-Population of 1.13bn itself offers huge opportunity

Currently India ranks as the most populous country in the world. The 1.1bn strong population has been growing at a rapid pace of 1.7%, much above the world average growth rate of 1.4% since 2001.

The young and the restless

With a median population age of mere 24.5 years India is currently one of the youngest countries amongst its peer group. This puts India at an inflexion point of growth, in a similar manner to US in early 1960’s, which kick started the retail and real estate revolution.

Working population of 41%, likely to rise to 44% by 2015
Second largest pool of engineer graduates in the world


Prosperity catching up with aspirations

Booming economy along with higher services sector contribution has led to a faster growth in income levels. With the average qualification level moving up, income levels have moved up in tandem as well.

A study by Hewitt Associates showed that salary grew by 13.5% in 2005. The middle-income households or the consuming class are expected to grow from 35% in 2006 to 48% in 2010.

Growing urbanization and nuclear family structure

The rise in household income is slowly percolating into growing urbanization. While urbanization is likely to pick up pace with a lag, individual land pockets are expected to report much faster growth than others.

Fallout of the growing urbanization and growing income levels and the double income no kid (DINK) syndrome has been nuclear family structure. Average urban household size has dropped from 5.7 in 1971 to 5.3 in 2001 and is expected to fall further to 5.0 by 2011. This is likely to create huge demand for urban housing leading to further expansion of the city’s suburban regions.

Real estate markets have been built on themes

Most of the world’s best real estate markets have been built on one or several themes based on economic growth. These have essentially helped transform the respective markets into real estate investment havens. Themes could be varied like the prospering hotel industry in Dubai, retailing in South East Asian countries, gambling in Las Vegas or even an Olympic event (China) or a football world cup.

All successful themes have had one common factor for sustained growth in real estate prices and that is population migration into the host city.

Indian IT/ITES– The world’s back office

The commercial real estate demand has its roots in India’s IT/ ITES off-shoring success. The sector has been growing at the rate of more than 30% CAGR for the past 5 years.

The country’s success at low-end voice based services and ready talent pool has helped it receive high-end business process outsourcing contracts.

With India expected to maintain its competitive advantage, demand sustainability of 25-30% CAGR in IT/ITES services over the next five years is not under threat. Sustained sector growth would likely keep employment demand in line as well.

IT/ITES to drive office space demand

High employment demand over the past few years in the IT/ITES business has led to an unprecedented demand for commercial office space which has grown to almost 38mn sq ft by 2005, and is expected to go up to 200mn sq ft by 2010.

Almost 75% of the total office space demand is anticipated from the IT/ITES sector alone. In addition to this BPO and off-shoring services have a cascading impact on retailing, housing and support infrastructure like roads, airports, educational institutions and hospitals.

Housing - Demand far outweighing supply

The last census put India’s households at 192mn in 2001, up 39mn from the 1991 census and 69mn from 1981 census.

This coupled with drop in the average household size from 5.7 in 1971 to 5.5 in 1991 and 5.3 in 2001 indicates that apart from population growth, nuclear family structure is slowly finding ground in India.

This has resulted in a housing stock shortfall of 19.8mn despite the strong inflow of supply over the past one decade.

Indian housing shortfall is pegged at 19.8mn units and estimated to be at 17.9mn by 2010

IT/ITES sector alone would create new urban housing demand of 30mn sq ft annually

While nuclear family structure remain the macro factors influencing demand, at a micro level huge employment opportunities in the IT/ITES sector leading to population migration has created a latent demand over the past few years. We expect the situation to persist and anticipate a demand of 30mn sq ft annually till 2010 to come only from this segment alone.

Housing Demands 2005-2010
IT/ITES employment (mn) 1.0
Housing Demand @ 30% (mn) 0.3
Average space per person (sq ft) 500
Real estate demand (mn sq ft) 150
Annual demand (mn sq ft) 30

Retailing - India still at the tip of the iceberg

With organized retailing forming mere 3% of the total retailing pie, India is far behind the developed counties and also its South Asian peers.

While organized retailing is estimated to have grown at a high rate of 25% CAGR over the past 3 years, we feel the growth rate is sustainable as entry of big players with deep pockets will expand the market further. The government has opted for a gradual opening of the sector to foreign players by relaxing norms for single brand outlets and through the cash and carry model.

The impact of FDI relaxation can be seen in China, where despite the top retail player being a Chinese company, foreign retailer outlets have mushroomed creating strong real estate demand.

Hospitality business – Growth unbounded

Growing foreign tourist arrivals, increased business and leisure travelling by domestic travellers has seen the Indian hospitality industry grow at a 15% CAGR over the past 3 years.

Growth of the medical tourism industry
Image The countries where medical tourism is being actively promoted include Greece, South Africa, Jordan, India, Malaysia, Philippines and Singapore.

India is a recent entrant into medical tourism.

According to a study by McKinsey and the Confederation of Indian Industry, medical tourism in India could become a $1 billion business by 2012. T

he report predicts that: "By 2012, if medical tourism were to reach 25 per cent of revenues of private up-market players, up to Rs 10,000 crore will be added to the revenues of these players".

The Indian government predicts that India's $17-billion-a-year health-care industry could grow 13 per cent in each of the next six years, boosted by medical tourism, which industry watchers say is growing at 30 per cent annually.

Growing foreign tourist arrivals

2006-07 saw arrival of approximately 4.633 million foreign tourists in India, thereby registering a growth of 13 per cent over the previous year. As per advance estimates, foreign exchange earned during 2006-07 due to tourism was $ 9696 million – a growth of 23.5 per cent over the previous year

The WTO expects India to witness a growth rate of 8.8% in tourist arrivals over the next 10 years.

Huge demand for premium and non premium hotel rooms.

Current Indian capacity stands at 103,000 rooms and falls short by 27,000 rooms. Beijing alone has 109,000 rooms.

Where does all these factors leave an investor?

All the above factors put India at an inflexion point where robust growth in real estate prices in the short as well as long term is guaranteed.

The tier 1 cities like Mumbai, Bangalore, Pune etc. have seen a rush in recent years resulting in some degree of saturation and a dearth of bargain properties.

If the selection is right,an annual growth rate of 35% is achievable by investing in properties in these Tier 1 cities, but there are some tier 2 and 3 cities which are growing at a still faster rate due to multiple themes like IT, Gem and jewellery, SEZ, Hospitality, Medical tourism, Retailing, Aviation etc. all coming together resulting in an astounding growth rate of more than 100%per annum.

One such vibrant city is NAGPUR, which is situated in the heart of India. With the development of one and only Multimodel Hub Airport Cum Cargo Hub between Bangkok and Dubai.