Fire in the hole

February 6, 2012 / By  

The Indian real estate business is a self-evolving organism with a life of its own. It exists in a symbiotic relationship with its environment, which comprises the Indian economy and Indian government policies, along with the global business scenario, and in which domestic demand is a very important aspect. The year gone by was a year of uncertainties, with the global economy struggling with potential slowdowns amidst risk of sovereign defaults, and reverberations sounding in outsourcing destinations. The Indian economy struggled with possible overheating, as inflation remained high and growth slowed.

While a slowdown in demand for commercial office space was expected during 2011, the robust absorption recorded during the year allayed some slowdown fears as firms that were committed towards India and its business attractiveness continued to invest in its growth story. Over the next few quarters, European firms are expected to take a larger share of the outsourcing business in India, although US based firms will still remain the biggest contributors.

Certain policy matters were also brought to a head during this period. While Parliament debated the benefits of allowing 51.0% FDI in multi-brand retailing, the government inserted safeguards (minimum sourcing percentage to be done locally) and suggested a phased start-up in cities with more than one million population only. As, in the end, no consensus could be reached, the proposal was put on hold, with a host of domestic retailers expecting to begin talks with global retailers for strategic tie-ups if the plan were allowed. However, as a carrot, the government allowed 100.0% FDI in single-brand retailing, which spurred a host of global brands to infuse more foreign capital into their ventures in India and seriously consider the “going solo” route. Retail absorption showed improvement throughout 2011. For the future, demand is expected to polarise towards select, premium retail assets, with major expansion plans drawn up by both international and domestic retailers.

Residential housing demand was impacted by the steady rise in housing prices, caused by a combination of spiraling land and construction costs. Buyers struggled with a high inflationary scenario, which made the Central Bank (Reserve Bank of India) tighten its monetary policy, increase interest rates, and squeeze the excess liquidity from the market. With real estate developers also grappling with expensive credit and a funding crunch from banking institutions, the situation needed some corrective measures, but a few credit defaults in the near future may be imminent. A recent RBI decision to cut the Cash Reserve Ratio (minimum cash ratio to be maintained by banks), is a precursor to a future reduction in interest costs. A control mechanism to rein in inflation and inject more growth-oriented momentum into the economy, albeit coupled with structural uncertainties in the global business environment, will ensure that the Indian real estate sector is kept on its toes and continues to evolve.

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