The real estate sector in India is badly hit due to high interest rates and slowing economy. Property developers in all major cities are battling significant drop in sales of residential properties due to the economic slowdown and delay in approvals. Mumbai and Delhi, which already witnessed a substantial dip in sales of commercial properties in the past couple of years due to excess supply, are now hit by a slump in sales of residential properties.
However, things might be about to improve for the sector for two reasons. First - the recent decision of the government to allow foreign direct investment (FDI) in the multi-brand retail sector will help the real estate sector in the country. This will increase the demand for commercial space in the market. At the same time, as the demand for office space will continue to be strong, fresh jobs creation in the country will also see a strong growth.
Normally, when a company takes 1,000 sq feet of office space on rent, it employs around seven people to fully utilize that space. That means, at least seven new people will enter the job market and, on average, five out them will buy residential apartments. Therefore, according to the thumb rule, the requirement of residential space increases five times that of the commercial space used. Therefore, if the demand for the commercial space remains strong, it will also continue to give a fillip to the residential real estate.
Second - The Government of India (GOI) is planning to take several steps to boost the economy and reduce the fiscal deficit. The government, in turn, made clear it wants a rate cut at the Reserve Bank of India (RBI) next monetary policy. In the last meeting, the RBI cut the cash reserve ratio (CRR), the share of deposits banks must keep with it, by 25 basis points to 4.5% in a move to inject about Rs 170 bn into the banking system ahead of expected liquidity tightness due to advance tax payments and festive-season demand. If the RBI does cut interest rates, the real estate sector will get another boost. Favourable global liquidity, lower mortgage rates (mortgage rates have fallen 50 bps in the last six months), 25 bps cut in CRR and likely interest rate downcycle are all positives for the sector.