Indian Real Estate has the right mix

It’s all a Matter of Chemistry… Indian Real Estate has the right mix

 

Real Estate Markets have a lot in common with chemistry: take two parts, hydrogen, one of oxygen, and, hey presto, you get water; take high supply and liquidity levels, mix in the right interest rates…and, as if by magic, you get a housing boom. The magic’s all in the mix, and that’s why India has seen a surge in property sales over the first quarter of this year: 99,500 to be exact, which, according to Anarock (www.anarock.com) is the highest level since 2015. It equates to an annual rise of 71%, and the hotspots of Mumbai and Hyderabad accounted (on their own) for 51% of new starts and 48% of total sales. On any basis, it’s a heady mix, but it’s also the right mix…ignited by an unrelenting appetite for home ownership on the Subcontinent, and there’s no sign of it slowing down soon…it’s all a matter of chemistry.


So let’s take a closer look at the key factors in the mix: supply, liquidity and interest rates.


Supply-Side Dynamics

New property starts in India have been rising exponentially since the dark days of COVID, creating an average 2% decline in unsold inventory (which, in turn, masks regional reductions as high as 11% in Chennai and 10% in Mumbai). And that’s not happening for anything: as Anuj Paul, Chairman of Anarock Group put it, with an admirable sense of understatement: “The unrelenting appetite for home ownership amid the pandemic, coupled with a growing certainty of impending price rises, has increased house sales velocity: we are witnessing a bull run in the housing market”.


That makes it all the more important, then, for new and pent-up housing supply to be able to meet (if not exceed) demand…which is something India has been doing with a vengeance, and that’s the first part of its successful formula. Although, of course, there still has to be enough liquidity within the economy to fuel the demand…


Liquidity Levels


The Rupee has fallen sharply against the US Dollar over recent weeks (standing at 77.99 by 15 June), but that’s got more to do with a current 20-year high in US interest rates than anything else, and Central Bank interventions on the Subcontinent mean liquidity levels are still more or less Teflon coated: the Reserve Bank of India (www.rbi.org.in) remains committed to injecting added liquidity through open market operations (“OMOs), and is likely to continue with that policy for the foreseeable future. And even though the Federal Reserve is on a broadly parallel course, its own OMO activities are widely expected to fall off in intensity after September, leaving more headroom for India to pursue an increasingly expansive programme.


All of which points to a stronger Rupee going forward and, of course, extra liquidity to turbo charge an already vibrant real estate sector. And that’s the second part of the mix. Which takes us to…


Interest Rates


Along with other leading economies, India has seen a recent spike in inflation (largely due to global factors outside its control, such as shortages caused by the war in Ukraine), but it’s nothing like as bad as, for example, the UK, which is projecting a 15% rate by year-end, and virtually zero (or negative) growth. The Subcontinent, on the other hand, is expected to have inflation rates significantly less than half that (6.04%) come the end of the year (www.globaldata.com), and with India’s economy currently growing by 8.7%, the Reserve Bank has been able to opt for a much more controlled rise in the Repo Rate to 4.90%.


That’s not going to do much (if anything) to dampen the resilience of its domestic property
markets…which is more than you can say for the US and the UK, each of which has months of tortuous and ever more contentious rate rises in the pipeline. In short, home buyers in India can look forward to relative interest rate stability …which is the third and final element in the mix.


So as you can see, there’s no special magic…it’s all a matter of chemistry.


Executive Overview


Macroeconomic policies, particularly when it comes to liquidity and interest rates, are sustaining a buoyant real estate market on the Subcontinent, and once you add in an increasingly impressive supply-side dynamic, it all adds up to a recipe for success…the chemistry couldn’t look better.

 

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Red Ribbon RE RISE India Real Estate Fund is a multi asset class closed-end fund registered in Luxembourg offering investors the opportunity to participate in Growth and Emerging Markets and Mainstream Impact Investments, such as India, that offer returns rarely available in western markets.

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