While stocks and bonds have held their position as traditional investment instruments, investors are increasingly looking for alternate investments such real estate, hedge funds, private equity and exchange-traded funds (ETFs) to engineer an overall enhanced performance of their portfolios.
Improving construction quality, enhanced market transparency, and availability of suitable options have made real estate a good asset class to invest in. It provides a stable and predictable income yield along with a possibility of capital appreciation. While residential markets in India have already witnessed a rapid bounceback, commercial markets had touched a cyclical low and are expected to recover.
The market value of investment-grade real estate in India under construction has increased from USD 69.4 billion at end-2006 to USD 101.3 billion by end-June 2010, which is 8.2 percent of India’s nominal GDP for 2009. A significant portion of this market value is costs of construction and development of these real estate assets. The costs have been assessed to be USD 48.5 billion over a period of 2-3 years.
The market value of commercial (office and retail) real estate under construction is USD 34.8 billion. Commercial office space under development contributes 74 percent of the estimated market value being developed in the commercial sector. As of the second quarter of 2010, Tier I cities of Bangalore, Mumbai, and NCR-Delhi contribute to 70 percent of the market value of commercial office space under construction, while Tier II cities of Chennai, Pune, Hyderabad and Kolkata contribute to 21 percent of the pie. Other investment-grade developments in Tier III cities contribute to a mere nine percent of the pan-India market value being developed in India today.
However, with infrastructural developments and lower real estate costs, the share of Tier III cities is likely to grow in future. While the Tier I cities contribute to 62 percent of the commercial retail space under development, 27 percent is supplied by the Tier II cities.
The residential sector has been the most resilient one in the recent downturn, aided by the high demand for housing in India. While residential property prices slumped in the first half of 2009, their rapid recovery in the second half of 2009 and first half of 2010 was accompanied by a slew of launches across India.
As of the second quarter of 2010, the market value of residential properties under construction is USD 66.5 billion, contributing 66 percent of the value of total real estate under construction in India.While the premium segment comprises only four percent of the saleable area being developed, it contributes to 24 percent of market value. While NCR-Delhi leads in terms of volume of residential properties being developed, Mumbai contributes a larger share to the market value.
Foreign direct investment (FDI) in housing and real estate in India increased steadily from USD 0.04 billion in 2005-06 to USD 2.18 billion in 2007-08. Since 2007-08, a total FDI of USD 7.82 billion has been put into housing and real estate in India. Considering an average construction period of three years for properties, this comes to 7.7 percent of the market value of investment-grade real estate under construction as of the second quarter of 2010.