Bullish on India: Why 2023 - 2047 could be the best couple of decades for Indian real estate

Besides construction of launched units, city-, town- and project-planning to provide the matching infrastructure and transport links are now part of the system. (Photo by Chen Ichun via Pexels)

The Indian residential real estate market is at an all-time high, and unlike in the past, is picking up around the country. With the end user buyers in their mid-30s onwards firmly in the saddle, it is unlikely to be rocked as severely as before. Investors have joined the party but they are not just trading in properties, they have time schedules and exit strategies. That augurs well for the industry as a whole. Commercial real estate has moved out of the control of developers into professional managements such as  Brookfield and Blackstone and returns can be computed on well-managed balance sheets that are regularly declared, and managed under the watchful eyes of the Securities and Exchange Board of India (SEBI). Logistics, warehousing, data centres, all the frills and flounces of a rapidly growing economy, have their roots in real estate across the country. So I am bullish about the next 25 years, when India becomes a mature, 100-year-old democracy.

Let me now elaborate on why I think this is so. During the past cycles of growth in the residential sector, the growth always began with end user demand, as happened during the Covid pandemic lockdown. However, a series of events had conspired to make available a huge bank of ready-to-move-in houses, which the fence-sitting consumers were reluctant to buy till then. As soon as the definite need to own property was felt, those who had access to finance, immediately chose from among the large number of options and bought the houses and occupied them. It left very little stock for the investors to put their funds into. By the time the investors got their act together, the early-bird users had picked up all the best properties.

This time investors got into newly launched properties but they have come on the back of rising rental demand and a need to shore up regular family earnings with monthly rental returns. Covid has made everyone realize how quickly fortunes can change. This time both end users and investors want houses complete.

The whole system is now geared towards completion of launched projects. Consumers have the Real Estate Regulatory Authorities (RERAs) to go to. Unlike the earlier era, retail consumers only pay in construction-linked plans so that payments are subject to completion of a stage of construction. Money is paid into escrow accounts and developers can only access a portion of it to complete construction. This bodes well for the next couple of decades when India will see intense urbanization across the country. Besides construction of launched units, city-, town- and project-planning to provide the matching infrastructure and transport links are now part of the system.

Real estate finance has been a piece that India did not get right for a long time. Now bankers are cautious about lending to entities with no proven background of ability to complete projects, and are duty-bound now to call in their money if things go wrong. The Insolvency & Bankruptcy Code, 2016, has laid down the norms for recovering the stuck resources. Banks are unlikely to look away as unscrupulous borrowers syphon off money, leaving projects in the lurch. In fact, with the tightening of norms, many non-serious players have already exited the industry and new entry barriers are being established to ward off fly-by-night operators.

Even projects that have been stuck are now being given to builders by various authorities such as RERA and the National Company Law Tribunal, to complete and hand over. This has created a new category of experts who only come in with resources to acquire, complete and exit with a fixed management fee. The presence of traditional contracting companies actually tips the scales in favour of that project.

Brands such as Tata, Godrej and Mahindra have entered the housing market with structured processes and new norms of delivery. This has also created healthy competition in the market. The residential market, I believe, is sorted for the next 25 years and just needs monitoring and nudging in the right direction. Institutionalized housing may well become the norm after about a decade when returns improve as interest rates hit global levels.

The commercial markets have stabilized and consolidated into interest and dividend generating entities. Practically all large developers such as DLF, RMZ, Rahejas and Embassy have sold off their assets to property management firms and the Real Estate Investment Trusts (REITs) are now generating healthy returns to investors. Fractional ownership companies are also busy aggregating smaller assets into productive investment assets. The market is likely to grow as specialized REITs and fractional asset funds are poised to pick up education and health infrastructure.

This augurs well for a growing and upwardly mobile Indian middle-class whose aspirations will keep these construction wheels in motion for the next 25 years.