Indian Economy and Real Estate to stay strong despite global headwinds

The world economy has been gradually tapering off from the robust growth witnessed on the back of the post-pandemic recovery. High inflation, rising interest rates and geopolitical concerns has experts indicating at a mild recession in many advanced countries towards the end of current year, with the US possibly facing that risk sometime early next year. Closer in Asia, China due to supply chain disturbances as well as intermittent lockdowns is showing high risk of imminent slowdown.

During such times, not appearing risky by itself is an economic privilege few would be enjoying. For the Indian economy the current growth outlook looks positive. Up until the recent months, most monthly high frequency macroeconomic indicators showed a positive outlook. India’s Central Board for Indirect Taxes projected an average GST collection of ~INR 1.3-1.4 trillion per month for the current fiscal year 2022-23, and the actual recorded run rate for first quarter (Apr-Jun) has averaged INR 1.5 trillion. Under the government’s Make in India programme and Production-Linked Incentive (PLI) schemes, India now features high amongst global manufacturers. According to C&W’s Manufacturing Risk Index 2021, India emerged as the second most sought-after destination by manufacturers globally. Merchandise exports have been healthy as India surpassed its target export revenues of USD 400 billion during the last fiscal year 2021-22.

The dominant & highly globalized Indian IT-BPM sector as well as the growing number of Indian start-up unicorns have all spelt-out ambitious targets for hiring of manpower. The National Association of Software & Services Companies (NASSCOM) of India projected a 3X rise in hiring by start-ups over the next 4 years (2022-26), whereas top-5 listed Indian IT services companies have laid out plans to hire around 200,000 people in the current fiscal year ending Mar-2023. With global IT services spending anticipated to grow by 7.0-8.0% annually (Gartner estimates) in the near-to-medium term, big opportunity awaits Indian IT-BPM industry. A significant rise in outsourcing to India could be on cards given that cost pressures will be high in economies such as the US as unemployment is at its lowest levels of 4.0% or below.

At the start of the year, it seemed audacious to forecast office sector rebound in 2022 to be as strong as what we witnessed during pre-Covid in 2019. Our projections had suggested that India’s office leasing could surpass 60 MSF mark, thereby recording its second highest gross leasing volume (GLV) of all times. With first half of the year now behind us, GLV has surpassed 37 MSF (for 1H-22), achieving ~61% of our forecasted number for this year. At C&W we are increasingly confident that the current year can record GLV volumes comparable to the historic high levels of 2019 (~68 MSF). More and more employees are returning to work across cities post pandemic, thereby fueling demand for new office spaces. A recent in-house survey of the leading business/tech parks across top-8 cities showed that, on an average, 50-70% employees have been returning to office as of July/Aug 2022.

In the residential market, a mainstay of Indian real estate, the exuberance witnessed since last 6-8 quarters continues unabated. The launches of residential units reached historic high levels of 145,000 units in first half of 2022. What started-off as an opportunistic response from end-users to state government incentives during the Covid-inflicted period, has now snowballed into high consumer, investor, and developer confidence-driven growth. Rising income and high affordability levels in India have been driving sales even as inflation rates are high and interest rates have started rising. What is encouraging to see is that buyers are making a clear distinction between reliable or trusted developers versus others; thereby allowing the former to earn a much-deserved premium for the superior quality. It is noteworthy, the share of listed and reputed developers in overall launches have moved up from ~15% in 2019-20 to ~22% as of most recent quarters. The Indian residential space is undergoing a transition, and it bodes well for growth of organised sector.

The industrial & logistics sector has seen double digit growth in recent years, and market traction continues to remain healthy. Retail one of the last to recover from the shadows of pandemic, today has listed retailers and mall developers recording pre-Covid levels of revenue and is back to normalized footfalls. For the organised retail market, India continues to remain under-penetrated, which is a reason why institutional investors will continue to chase quality assets in this space. ?

Factors such as quality construction, ESG adaptation, institutional ownership, trusted developer etc. are the new metrics for project evaluation in addition to the erstwhile differentiators of location, connectivity, and amenities. India’s commercial & residential real estate have been offering global investors opportunity across multiple asset classes, and investors have been responding to it with enthusiasm. The private equity inflows into real estate showed a significant decline in the 1H-22 (~50% dip) over same period last year. We expect this to be a temporary dip, as the India growth fundamentals are strong, and till the time return-to-office in the country has an upward trajectory, office sector will continue to grow and attract investor interest. We firmly believe that the Institutionalization of Indian real estate is expected to pick-up pace from here, and we could see a rise in market transparency, thereby attracting an even larger share of global investment allocation in years to come.