Bain: real estate demand in India to grow by 9% per year

24 May 2016

Supply and demand in India’s residential property market have, in recent years, been diverging. Major cities in India have considerable overhang as prices remain high while demand is low. The coming years are projected to see more favourable conditions for developers, as economic growth picks up and cultural changes towards urbanisation and nuclear families pushes up demand for space.

In a report by Bain & Company, titled 'Residential real estate in India: A new paradigm for success’, the management consultants explore the dynamics of the Indian property market. The study looks at a range of factors affecting the market today, as well as projects changes in key dynamics for the coming five years.

Indian property supply and demand conditions

Real estate developers in India have, in recent years, been met with considerable market headwinds. As it stands, many of the country’s largest cities have seen housing supply far outstrip demand. Developers have been stubborn in not significantly reducing the price of units, instead entering a ‘wait and see’ holding pattern, while buyers are waiting for more favourable macro-economic conditions before making their often largest life purchase. 

As a result, absorption rates have stagnated, causing high levels of overhang across all major cities, particularly Gurgaon and Mumbai. The country's largest cities have seen considerable overhang increases over the past two years to average more than 30 months – with one city reaching close to 60 months.

Economic growth India

One of the macro-economic factors affecting the sector is the recent dip in the Indian economy. GDP growth rates dropped off from around 10% at the start of 2011 to between 5% and 8%. Industrial production rates too saw slowdowns since 2012, while the market capitalisation of listed companies has remained relatively flat. There is some good news regarding the longer term projection of India’s major economic indicators, with GDP growth and industrial production growth edging up again in the mid-term.

Indian residential real estate market

The current glut in demand is expected to see considerable change in the coming years as more and more Indian families seek out urban centres, and family dynamics change toward a more nuclear family type – requiring more space per person. The retail industry is also continuing to boom as the middle class grows.

In 2015, the real estate demand in India amounted to 880 million square meters, with the largest proportion of this (85%) going to retail. By 2020, this is projected to grow to 1.35 billion square meters, although the mix of demand will change slightly. Residential real estate will continue to see strong growth at around 9% CAGR, commercial will see 7% to 8% growth rates, while retail will see the fastest paced growth at 25%.

Economic indicators in India

According to the Bain analysis, of the near-term development within the real estate market, a number of factors are likely to see overhang time come down, as the supply and demand pictures converge.

One such factor is that the Reserve Bank of India (RBI) is seeking to initiate a virtuous cycle of consumption and growth, interest rates have been falling while inflation has stabilised. Consumer confidence has also seen some gain since a considerable dip at the end of 2013. As consumers become more confident, they may decide to step into the housing market.

Further boosts to the sector are contained in the Real Estate (Regulation and Development) Bill, which is set to improve the transparency, customer-centricity and process adherence of developers – reducing costs for consumers while reducing burdens for developers. "There are the signs of light at the end of the tunnel," says Gopal Sarma, the head of Bain India's Real Estate and Infrastructure Practice and lead author of the report. "While quoted property prices have yet to correct for supply overhang, both upfront and discreet discounts have increased, and so have innovative pricing schemes such as possession-linked payment plans and subvention schemes."