January 12, 2015 - Global Markets
As compared to other destinations for cross-broader real estate capital, India has struggled historically with a lower investment profile. Weighing on perceptions of the business environment, concerns about corruption and chronic underinvestment in infrastructure have coincided with a mixed track record on economic growth. The World Bank currently ranks India 142 out of 189 nations for ease of doing business. From an exceptionally robust pace of 10.3 percent in 2010, the World Bank reports that Indian GDP growth slowed to just 5.0 percent in 2013.
The election in 2014 of Narendra Modi to premiership may be a watershed moment for the Indian economy. Before coming to New Delhi, Mr. Modi presided over the state of Gujarat during a period of liberalization and rapid economic expansion. The market now hopes that he will do the same on the national stage. While his ascendance has focused attention on some of his party’s ideological positions, it is the new Prime Minister’s economic record that has swayed voters and investors.
In terms of real estate markets, drivers of demand for space are well entrenched in the country’s growing population and a rising middle class. The supply of space meeting the needs and expectations of this demographic is growing rapidly.1 Even so, space constraints are a feature of this market. The Retailers Association of India, for example, cites the quality of retail space as major constraint faced by retailers. India is no different from other real estate markets in that capital is a necessary ingredient to the development equation. Matching equity and debt capital sources to risk-equivalent projects is inefficient, however.
Less than a year into his tenure, early evidence of Mr. Modi’s reform initiatives extends to India’s real estate sector. In particular, the introduction to India of real estate investment trusts (REITs) and real estate mutual funds (REMFs) may have far-reaching implications. In the best case, they will not only serve as conduits for capital flows to Indian real estate, but also as a disciplining force that encourages market transparency and standardization.
1 CBRE reports that the stock of investment grade office space has increased from under 100 million square feet in 2005 to over 400 million square feet in 2014.
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