India has been “hot” since the arrival of summer some weeks ago, but its economy looks “cloudy” due to a few concerns of sluggish industrial production and slowing growth rate. Even the announcement of the 2012 budget could not make people happy at the end of the financial year, which is when they generally look forward to a celebration. As the Managing Director of the IMF, Christine Lagarde, emphasised recently during a speech in Berlin, “2012 can be a year of healing” for the global economy. The IMF, in its World Economic Outlook announcement in January, revised downward the growth of the Eurozone and most of the developing economies. India’s GDP in 2012 has been revised down to 7.0% compared to the 7.5% forecast in September 2011. This downward adjustment came about mainly because of the subdued manufacturing activity and high interest rates in the domestic economy.
The current sluggish economic performance is expected to moderate the growth of the real estate sector in the short term. Commercial real estate, which is heavily dependent on the IT sector, is likely to grow slowly compared to 2011. Although the US is seeing a marginal recovery, the Eurozone crisis is expected to dampen overall demand for software from India. The overall office vacancy rate is predicted to rise due to the moderation in demand and the substantial supply in the pipeline.
The Reserve Bank of India (RBI) is not willing to slash its policy rates heavily to avoid an inflationary situation, which is something for which the bank has fought since 2010. Thus, the economy is expected to move with a slow growth and high interest rates environment for a few more quarters until inflation is completely under control. This implies that demand for housing is likely to be slow in 1H12 due to higher cost of funds for developers and status-quo on affordability for buyers.
The retail real estate sector has performed steadily in the aftermath of the global economic crisis, and saw some improvement in 2011. This can be attributed to the recovery in consumer expenditure, and the improved employment and income situations. But, there has been shortage of quality retail supply in major cities due to lack of proper policies related to the sector and this has resulted in the widespread polarisation of demand in malls.
However, the long term outlook of the Indian economy looks optimistic as the country is blessed with many advantages, from its vast geography and abundant human resources to established IT, organised banking and financial services (BFSI) sector and a huge talent pool. Over the past decade, the country has proved itself to be one of the fastest growing economies in the world. Thus, the current “clouds” in the economy are believed to be temporary, caused by the slowing of the economies in developed markets, and can be chased away with effort from the government and market mechanisms, at which point, we see a bright future for real estate as this sector has tremendous scope for growth.
