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Labourers work at a building site in Mumbai on September 12, 2023. While India faces major economic challenges, the property industry is going from strength to strength. Photo: AFP
Opinion
The View
by Nicholas Spiro
The View
by Nicholas Spiro

India’s trend-defying property market is a sight to behold

  • A growing middle class, the right government support and a favourable external environment have given the property sector wings to escape the headwinds buffeting markets elsewhere
  • The Indian economy’s exceptional performance and potential is driving sentiment all across the sector, from residential to office and retail
Nicholas Spiro
Nicholas Spiro
Why you can trust SCMP
At a time when the real estate industry the world over faces severe headwinds, from the sharp rise in interest rates to weaker demand for offices in the post-pandemic world, the outperformance of India’s property market is a marvel to behold. A confluence of unique and potent domestic and external factors is transforming the sector and turbocharging growth.

First, the expansion of the middle class is setting the stage for a discretionary consumption boom. According to Morgan Stanley, the number of households earning in excess of US$35,000 a year is likely to rise fivefold between 2021 and 2031, with consumption driven by the “AAA” opportunity of age, aspiration and access. This makes India “the best domestic demand” story in Asia, Morgan Stanley says.

Second, India’s appeal as “the office to the world” – underpinned by the nation’s vast low-cost talent pool and much lower office rents than in other leading markets – is enhanced by government policies aimed at improving the competitiveness of the manufacturing sector in an effort to make India the “factory to the world” as well.
Third, long-awaited supply-side and regulatory reforms, including the development of a listed real estate investment trust (Reit) market, have improved the business environment significantly and catalysed the institutionalisation and financialisation of the property industry.

Fourth, India is taking advantage of the geopolitical reshaping of supply chains as multinational companies seek to increase their resilience to future shocks. Asia’s third-largest economy is more open than China’s, with fewer curbs on foreign direct investment, particularly in the technology sector, “which means [multinationals] are able to participate more actively in India’s growth story”, Morgan Stanley notes.

To be sure, there are serious concerns about India’s economy. Not only has it failed to create enough jobs, casting doubt over whether the country can seize its much-touted “demographic dividend”, private investment has remained weak while the government’s conservative and nationalistic agenda seems to take priority over further reforms.
An attendee tries a virtual reality headset during the Vibrant Gujarat Global Summit in Gandhinagar, Gujarat, India, on January 11. The summit is one of Prime Minister Narendra Modi’s final bids to bring in headline-grabbing investments before countrywide elections, expected to be held in April and May. Photo: Bloomberg

Yet, it is the exceptional performance of India’s economy and its enormous potential that are driving sentiment in the property market. “There’s a gale of tailwinds. India has taken off like a rocket ship,” said Matthew Bouw, chief executive, Asia-Pacific, at Cushman & Wakefield.

The residential sector is leading the boom in real estate. According to data from JLL, sales in the top seven cities last year reached their highest level since 2008. The number of launches, moreover, also hit a post-2008 high, underpinned by strong and well-capitalised developers with solid track records.

Knight Frank notes a “significant shift towards premiumisation”, with the premium segment – home values over 10 million rupees (US$120,300) – the “stand-out performer” last year, enjoying sales growth of 33 per cent.

Although higher mortgage rates have increased affordability pressures as house prices continue to rise sharply, rates are still significantly lower than in the aftermath of the 2008 financial crash while household incomes are outpacing prices, providing a strong buffer.

Global trends in the property industry are being bucked more spectacularly in India’s fast-growing office market, which is being propelled by the country’s competitive advantages stemming from its large engineering talent pool, low-cost labour, infrastructure, and world-renowned information technology (IT) outsourcing sector.

According to CBRE, gross leasing volumes in nine leading cities last year reached 61.6 million square feet (5.7 million square metres), the second-highest level on record. Global capability centres – offshore units of multinationals traditionally focused on back-office services but now increasingly serving as innovation hubs – accounted for 40 per cent of leasing activity.

Employees of First Solar work at its manufacturing facility in the Kanchipuram district of India’s Tamil Nadu state on January 11. India’s appeal as “the office to the world” is boosted by government efforts to improve the competitiveness of its manufacturing sector. Photo: AFP

Indian cities offer occupiers much lower rental costs while institutional landlords are setting new standards and benchmarks for the sector. Rental values in the top seven cities are the lowest among the leading office markets in the Asia-Pacific region while green-certified buildings’ share of the grade A stock exceeds 50 per cent, data from JLL shows.

The development of a listed Reit market has acted as a catalyst for increased participation by domestic institutions in a real estate sector hitherto dominated by foreign investors. Earlier this month, Cushman & Wakefield and Nuvama Asset Management announced they had formed a joint venture designed to provide investment opportunities to domestic investors in Indian commercial property, with plans to launch a fund focused on prime offices.

The retail sector – which has been out of favour with investors in the US and Britain due to oversupply and the disruption to physical stores caused by the surge in online shopping – is also benefiting from far-reaching structural trends in India’s consumption-driven economy. According to JLL, 40 million sq ft of shopping mall stock is expected to be delivered in the top seven cities alone by the end of 2027. A quarter of the supply, moreover, will come from institutional landlords.

iPhones are displayed inside India’s first Apple retail store during a media preview, a day ahead of its launch in Mumbai, India, on April 17, 2023. India’s retail sector is also benefiting from far-reaching structural trends in its consumption-driven economy. Photo: Reuters

In May 2023, US private equity fund Blackstone launched India’s first shopping centre-backed Reit with best-in-class properties in 14 cities in a sign of the potential for further institutionalisation of real estate across the country.

Established developers such as Phoenix Mills operate investment-grade shopping malls in Tier 2 cities. “The market has made a distinction between who can run the show [in Indian retail] and who can’t,” said Vivek Rathi, national director of research at Knight Frank India.

Indian real estate has come a long way over the past decade. While the country faces major economic challenges, with a crucial general election over several weeks in April and May adding to the uncertainty, the property industry is going from strength to strength. Given the global headwinds, this is no small feat.

Nicholas Spiro is a partner at Lauressa Advisory

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