Alastair Hughes: What Modi mania means for real estate
Prior to the global financial crisis, India was one of the darlings of the real estate private equity investment community. The country had strong demographic fundamentals, a reform-minded government and promising economic growth. Money from around the world was flowing into Indian property.
But over the past several years the mood has changed dramatically. Political paralysis, corruption and darkening investor sentiment have resulted in burnt fingers for many international property investors, prompting them to withdraw from the market.
Fast forward to 2014, however, and the Bharatiya Janata Party's overwhelming victory in the recent elections has served to instill a new optimism in the country. I was in Mumbai shortly after Narendra Modi was elected as prime minister, and the increased confidence in the business community was palpable, both in my meetings with colleagues and with clients.
The big players in India's real estate market have welcomed the new government in the hope that it will put the economy back on track and improve the gross domestic product growth rate from below 5% to 8-9% in the coming fiscal year. In order to stand a chance of achieving this goal, Modi's government is expected to work to remove the major bottlenecks that contribute to policy paralysis and deter growth.
Three key policies
Since Modi took office, the rupee has strengthened and the stock market has hit record highs. Domestic money is searching for good investment options and foreign cash, which has spent the past two years waiting in the wings, is ready to re-enter the market. Improved sales -- coupled with increased availability of funds from both domestic and foreign investors, with around $1.8 billion currently being raised -- are set to bring significant relief to developers and finally end the liquidity crunch.
In Modi's manifesto, the three most pertinent promises that would directly affect the real estate sector are: the development of 100 new cities; putting a new land use policy in place; and planning for low-cost housing.
Large infrastructure projects such as the Delhi-Mumbai Industrial Corridor and the Dedicated Freight Corridor are likely to be fast-tracked, boosting development in their vicinity. These massive ongoing endeavors will result in huge demand for warehouses, giving a significant boost to warehousing- and logistics-related real estate. In turn, there will be a requirement for new cities to service these massive infrastructure projects, which, once completed, will lead to exponential growth of real estate in India's hinterlands as a result of increased connectivity. This will lead to not only warehousing but also residential and hospitality development.
Modi's pledge to implement an affordable housing policy, and thereby provide homes to every Indian family, presents a $150 billion business opportunity to the sector. The real estate community now also has real hopes of being granted the government's coveted "industry status," which would further ease fund flows.
Indian consumers, too, are optimistic about the impact the country's new government will have on real estate pricing and tax relief. Many expect that interest on home loans will be reduced and a proposed goods and services tax framework will be implemented.
Few commercial facilities have been built in recent years, as many developers have focused on residential projects. Throughout the last cycle, there was high demand from foreign companies for space for business process outsourcing, but that demand was not mirrored by Indian corporations. We expect that this will change post-election.
Most of the office space currently available is in peripheral locations. Rising demand for quality offices, limited vacancies and a limited pipeline have seen rents start to grow. On top of this, we will start to see an increase in investors looking for quality built and leased products. The combination of these factors will push capital values higher, presenting opportunities for investors and developers alike.
"Get a move on"
As my colleague Anuj Puri, who heads JLL's business in India said: "No government has a magic wand which can solve all problems at once. Reforming the economy is a gradual process, and we need to be patient." But the key difference in today's India is the strong desire for change and optimism that this can be achieved under Modi's leadership. Anuj once remarked: "We are fed up of the status quo and need to get a move on."
While investing in India is still not for the faint of heart, and there will be challenges ahead, all the signs suggest that "Incredible India" is about to take on new meaning.
Alastair Hughes is Asia-Pacific CEO at JLL and a member of the company's Global Executive Board.