BMI View: India has a promising outlook in terms of commercial real estate investment as the barriers previously opposing FDI have been reduced through government policy updates. With the economy growing and higher consumer spending, office and retail markets are currently being supported financially, with a knock-on effect to the industrial warehouse market as online retail is seeing growth. Rental rates are either sustained or marginally increasing due supply and demand level in most locations; however risks in the marketplace are reducing over the coming years as India looks to modernise.
Growth in India's commercial real estate market will be supported by an uptick in economic growth. GDP is forecast for 4.2% y-o-y growth in 2015 which is expected to be sustained over the next 5 year with 10.5% in 2016. Growth will be supported by regulatory improvements and an increase in investment as well as strong growth in imports and exports, industrial output and services output. These improving fundamentals will boost demand for real estate, as businesses expand and their operating environment improves.
Mumbai is India's largest city and the commercial and financial centre of the country and is also home to many major operations in the fields of engineering, healthcare, IT and other complex industrial sectors. Gurgaon is a leading financial and industrial city with a close proximity to Delhi and provides a base to over 50% of the fortune 500 companies. Bangalore is a prominent location for many IT companies as the city has a long standing reputation as the high-tech centre of India. Bangalore is also recently becoming an attractive location for many foreign companies' off shore centres along with Gurgaon. Hyderabad has long since been an attractive business location in India, with many industrial companies' operations in the city. The city is garnering a reputation as an IT and technology centre with healthcare and pharmaceutical sectors also developing. Chennai is the fourth largest city in India and is the major industrial and business centre of southern India and the city has a diversified economic base comprised of automobile companies, software services, hardware manufacturing, healthcare, and financial services industries.
By 2020 India will have the youngest population in the world, and subsequently the largest workforce entering the world of work. Demand is currently high for office space, particularly in large commercial centres such as Mumbai, but also in Gurgaon and Bangalore with secondary locations providing a cheaper alternative for companies. Development opportunities are prominent in these locations as there is confidence in the employment market supporting company operations and therefore affording rent. Demand is focused on high quality office space with off shoring operations also providing a boost to demand in secondary locations.
Retail trends are currently focused on the developing e-commerce sector, which is set to be worth USD200mn by 2020. Physical shopping space could be threatened by this rise; however the main areas for consumer spending of food and non-alcoholic drinks, and personal, insurance and other spending remain top of the list over the coming 5 years despite the online spending rise. The young population with a growing affluent middle-class of 250 million has created a demand for high quality, western-style shopping centres; providing opportunities for foreign developers in prime commercial locations.
The industrial sector has been long since supported by the strength of the manufacturing sector, with this a primer determiner for the growth of the country. However, the new trend of online retail spending has driven imports and subsequently the growth has outpaced that of exports in the manufacturing sector. The balance between imports and exports is expected to fluctuate over the coming years as consumer spending drives imports with manufacturing driving exports. Although one thing is certain, both require warehouse space which is set to be the main benefiter of the demand. India as a nation is looking to modernise and therefore the demand is primarily for high quality warehouse space. Along with these modernisation plans, the infrastructure in the country, which has historically been of poor standard, is set for improvements bolstering investor confidence in the sector.
Investment outlook in India is currently promising, with pro-business government plans supporting foreign investment and increasing levels of consumer spending, all forms of commercial real estate look to be in demand going forward. The opportunities lie most clearly in secondary locations for office and industrial sectors, as rental rates in prime locations such as Mumbai are too high and are causing companies to look elsewhere. Prime office space for off shoring operations in these secondary locations and warehouse space supporting the emerging e-commerce sector are at the forefront of demand.