Political and Economic Implications of Change for India's Real Estate Sector

Team Leader: Marissa Vaillant

Research Analysts: Hannah Barltrop, Aleeshia Carman, Ryan McCuaig,  Lauren Paparousis, Kavisha Patel, Jonathan Strom, Nicholas Terry

 

Politics and Demographics

        India is the second largest country in the world, with close to 1.3 billion people. As such, it is the In 2014, the populace elected Narendra Modi as their Prime Minister, who leads the Bharatiya Janata Party (BJP) in a majority government. The BJP is traditionally considered a Hindu Nationalist party and has long held the role of opposition to the secular socially liberal party, the Indian National Congress (INC). Modi and the BJP have been very popular, with some polls posting an approval rating of upwards of 70%. His massive popularity stems from his clampdown on corruption and black money stemming from bribes. However, his critics cite a lack of economic growth opportunities as a major concern about his decision-making ability.

        There is also a large role for religion in Indian politics, with most parties taking on a religion that representative of their policies. A notable exception to this rule is the secular INC party. As a Hindu Nationalist Party, the BJP tends to struggle more in India’s southern regions, where there is more religious diversity. In Southern India, there is a much greater concern about attacks on religious minorities from BJP supporters, and at times this concern has turned into violent protests by the ostracized groups. These acts are not without some cause, as the BJP has passed a number of controversial laws that would bring India more in line with the Hindi religious laws, such as the ban on cattle-trading, even in humanitarian circumstances.  In fact, the BJP has recently been on record as stating the Taj Mahal is anti-Indian Culture, as it was designed by a Muslim. This could have a very large influence on any kind of investment into real estate if it is done in such a way to alienate any of the Hindu majority.

        India’s military strength originates as a very strong regional power, looking to grow on the international stage. India does have nuclear capabilities, which it uses as a deterrent to their rivals, China, and Pakistan. As recently as late 2017, India has been shown to be developing their nuclear capabilities to be able to reach the entire geographical country of China, which is a nuclear-weapon state of its own. There has been some border conflicts with China, specifically regarding the Kingdom of Bhutan, as in July of 2017, it was reported that 300 Indian soldiers and 300 Chinese soldiers have been securing their borders in the Kingdom of Bhutan. This small regional border dispute has officials worried that this will bring memories back to the Sino-Indian war of 1962.  This is problematic as it could negatively affect any form of bilateral agreement between the two nations, and stifle any sort of economic cooperation between them.

 

Economic Outlook

        India is a leader in terms of economic growth and has emerged as the fastest growing major economy in the world. According to both the Central Statistics Organizations (CSO) and the International Monetary Fund (IMF),  the economy is expected to Fueled by their growing petroleum products, and gem and jewellery exports, India’s economy is expected to continue to grow and prosper for the coming decade. By 2025, it is expected to be the third largest consumer economy, behind the USA and China, and the second largest by 2040, behind only China. Other major factors in the growth of India’s economy are considered to be the demonetisation of the Indian Rupee, the rapidly expanding mergers and acquisitions market, and ease of government policies regarding international investment.

            India’s economy is also plagued with poverty and widespread inequality. With an unemployment rate of only 3.5%, most of the population has to work for the equivalent of pennies a day. Another cause of concern is the banking system. A majority of the banks have irrecoverable or bad loans making up over 10% of their total lending.  This is making securing any type of financing or loans from the Indian banks extremely difficult for both private individuals and large corporations, as they are very hesitant to take on more debt.

 

Real Estate

            The real estate industry is an integral component of India’s economy.  It is second only to agriculture as the largest employer by sector. The real estate industry is growing rapidly in India due to the fast economic growth, increased urbanization, rising household income, and is projected to grow a further 30% over the next decade. Several key policy changes in 2016 have opened the country to large inflows of Foreign Direct Investment (FDI), private equity transactions, mergers and acquisition activities, and tourism.  Investors in Real Estate generally measure the profitability of investments by revenue/square meters.  This means that investors will often look at the size of the available space, the use of the space, and the profitability of the occupied space. Investors in real estate in India should look for opportunities in areas with large commercial and retail land available that can generate either substantial revenue or appreciate quicker than other properties.

            A major investment opportunity exists in India’s Smart City Mission, where they plan to build, expand (or retrofit) 100 “Smart Cities”. These are cities that provide core infrastructure and give a decent quality of life to inhabitants along with a clean and sustainable environment.  The Federal Government has offered to match funding from State governments for up to 48,000 crores ($7.68bn USD) over five years for any Smart City project undertaken.  This means total funding can be up to one lakh crore (₹1tn rupees), or $15.36bn USD.  This is a huge opportunity for an investment group looking to enter into the Indian Real Estate Market. Combined with the growth in the economy, tourism, urbanization, and rising household income, provide an ideal market for investment.