Suvishesh Valsan, Senior Manager – Research, JLL India
Asian economies compete for greater global influence in terms of business, politics and sociocultural activity. Within economies, cities are the real growth engines. According to The Economic Intelligence Unit’s Hot Spots 2025 (2013) and AT Kearney’s 2014 Global Cities Index and Emerging Cities Outlook (2014), leading Indian cities have done well in terms of growing business activity and enhancing human capital. This is largely a consequence of efforts by Indian authorities toward embracing free trade and installing an effective tertiary education system. A 25% annualised growth in stock of office space in the top seven cities during the past ten years is testimony to rising business activity.
The greatest challenge facing Indian cities is to increase their competitiveness in Asia. The above-mentioned reports highlight some focus areas. With the newly elected BJP government in India, it is time we look at these factors and their property market implications.
Physical Capital: Infrastructure is deficient in India, and analysts suggest this negatively affects economic activity (GDP) by 2 percentage points annually. Planned infrastructure development could help Indian cities quickly attract international investors, and entice foreign workers. For instance, during 2006-08, quarterly growth in demand for office space in Gurgaon and Noida (part of NCR-Delhi) was more than double its long-term average figure, as metro rail connectivity was being established with Delhi.
Political Activity: Political engagement with foreign nations facilitates the growth of trade and commerce, directly favouring commercial real estate. India’s strong relationship with Japan resulted in cumulative developmental loans from the latter, growing at a CAGR of 16% per annum in FY2001-FY2013. The 12th five-year plan indicates that India needs overall investments worth USD 1 trillion for infrastructure development, and such foreign participation is important to accomplish this goal.
Financial Maturity: While financial governance, bank penetration and equity participation is satisfactory, Indian cities can significantly improve financial product awareness (insurance, mutual funds, etc.) and introduce new investment tools (inflation-hedging bonds, REITs, etc.). This would boost growth in Banking, Financial Services and Insurance (BFSI) sector, the third-largest occupier of commercial space in India. With a low mortgage-to-GDP ratio in India (India <10%; Hong Kong and Singapore >40%), increased financial maturity could also strengthen the housing market.
Institutional Character: In the past few years, Indian cities have faced global criticism for being less competitive in terms of tax structure, corporate governance and internal security. Institutional character directly influences business confidence, critical for real estate sector development. Additionally, instruments such as REITs thrive on robust tax and legal structures.
Environmental Issues: Profit seeking and environmental concerns have conflicting motives, and a balance between the two is needed for long-term sustainability of competitiveness. Recently, Indian authorities have been struggling to maintain balance, particularly affecting civil aviation, mining, manufacturing and real estate sectors. Diligent action on these policies could unlock large-scale real estate developments around upcoming projects without compromising the environment.
Narendra Modi, who heads the newly elected government in India, demonstrated an ability as Chief Minister of Gujarat state to deliver action with speed (less bureaucratic hurdles), clarity (unambiguous policies) and innovation (practical solutions to complex problems). This gives us hope that his government will pull up the competitiveness ranking of Indian cities, eventually benefiting real estate.