An Analysis of the Indian Housing Infrastructure Development in FY2021
Updated: Oct 23, 2020
The infrastructure of a country is accountable for the overall development and enhancement of facilities. Over the years, the infrastructure sector has become the most significant area of focus for the Government of India. During the fiscal year 2019 to 2023, India plans to invest US$ 1.4 trillion on infrastructure to have a sustainable development of the country. The Indian Government has made an investment of Rs 5,000,000 crore (US$ 750 billion) for railways infrastructure between the fiscal year 2018 to 2030. As per EconomicTimes, India will need investments of $1 trillion over the next 5 to 7 years to satisfy demand from infrastructure and housing with banks, private equity, and NBFCs expected to be the main sources of funds. The infrastructure and real estate sector has contributed to 29.5% of India’s GDP (including construction, real estate, transport, telecom, and storage) contrasted to 22.6% of the US and 17.6% of China.
With the growing population of the country, there has been an increase in the demand for housing infrastructure. The recent housing debt in India persists at 19 million units. This is expected to grow to 38 million units by the fiscal year 2030.
What will be the impact on the Indian economy due to the prevailing housing infrastructure market in India?
By 2040, the real estate market will rise to Rs 65,000 crore (US$ 9.30 billion) compared to Rs 12,000 crore (US$ 1.72 billion) in 2019. The real estate sector in India is anticipated to attain a market size of US$ 1 trillion by 2030 from US$ 120 billion in 2017 and will provide 13% to India’s GDP by 2025. Retail, hospitality, and commercial real estate are also increasing significantly, providing the required infrastructure for India's growing needs. Indian real estate developed by 19.5% CAGR from 2017 to 2028. The global reality industry is anticipated to reach a CAGR of 5.7% to reach USD 12,031.1 billion by 2024. As per the Department for Promotion of Industry and Internal Trade (DPI), from April 2000 to March 2020, Foreign Direct Investment (FDI) in the Construction Development sector including, townships, housing, built-up infrastructure, and construction development projects, reached US$ 25.66 billion. In 2019, massive investment in infrastructure is driven as overall private equity or venture capital investment of US$ 14.5 billion. The most massive settlement was done by Abu Dhabi Investment Authority, Public Sector Pension Investment Board, and National Investment and Infrastructure Fund where they invested worth US$ 1.1 billion in GVK Airport Holdings Ltd. India requires an investment of Rs 50 trillion (US$ 777.73 billion) in infrastructure by 2022 to have sustainable development in the country.
Source: Sustainability outlook
In FY20, the cumulative growth of eight core industries stood at 0.6%. As of 31 March, 26.02 million households got electricity connection under the Saubhagya Scheme. In 2019, the infrastructure sector witnessed seven mergers and acquisition (M&A) deals worth US$ 1,461 million. The residential construction industry in value terms increased at a CAGR of 6% during 2015-2019. The commercial building construction market in value terms is expected to record a CAGR of 6.8% over the forecast period. The infrastructure construction was estimated to be USD 3.3 billion in 2019, posting a CAGR of 4.8% during the review period.
The Indian real estate sector has witnessed high growth in recent times with rising demand for office and domestic spaces. Real estate attracted around Rs 43,780 crore (US$ 6.26 billion) in investment in 2019. The retail segment drew a Private Equity investment of around US$ 1 billion in 2019. Institutional investment in the sector reached US$ 712 million during the quarter ended in March 2020. According to the Department for Promotion of Industry and Internal Trade Policy (DPIIT), construction is the fourth largest sector in terms of FDI inflow.
How will the Indian Housing Infrastructure survive the COVID-19 pandemic in the future ahead?
The Indian Government launched the Alternative Investment Funds (AIF) to fight for liquidity in the market. With the coronavirus outbreak in 2020, the market for housing infrastructure has witnessed a stockpile of unsold inventory along with low-cost capital in this sector. The housing sales have declined sharply between April 2020 to June 2020. Transactions have dropped between 70 to 80% in major cities such as the Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Bengaluru, and Pune. There has been a slowdown in the new bookings of residential areas making it difficult for the industry’s operating cash flows to cope up. According to market reports, in the first quarter of 2020 ~78,000 ready-to-move-in units, at Rs 65,950 crore, considering for nearly 12% of the 6.44 lakh units in cities, are lying unsold. As per sales, developers are lowering the prices that may sell the housing stock in the short-term but, in the long-run will be damaging to the development of future projects in the housing market. From a buyer’s viewpoint, difficulties and challenges are prevailing in the sector even before the coronavirus came and made it even worse. A large majority of people due to their job security and salary pay cut, are obliged to spend on necessities like housing. On the other hand, this has created a higher potential for ‘rental housing’, as an option and is anticipated to grow to post the Coronavirus pandemic. With the market being unstable, there are chances the majority of the people will prefer renting a property then buying one. The government and statutory bodies have sustained the sector by taking initiatives and launching packages along with the RBI to boost liquidity. One of the significant moves has been the reduction in repo rates by 40 basis points to 4%, along with the lowering of reverse repo rates to 3.35%. However, the market predicts a slowdown i.e., a further delay for housing projects as the recovery of the sector post the COVID -19 crisis will be sluggish and obstinate.
To facilitate its recovery, the focus will have to be on the restoration of demand. The advantage of the repo rate should be transferred to the buyers directly from the banks. They should give the benefit of increased tax incentives through improved tax structures to the buyer and target Tier 2 & Tier 3 cities for further growth. It is also anticipated that this sector will acquire more non-resident Indian (NRI) investment, both in the short term and the long term. Bengaluru is expected to be the most preferred property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi, and Dehradun.
What initiatives has the Indian Government taken for the development of the housing industry in the country?
The Government of India along with the governments of respective states has taken several initiatives for further development in the sector. One of them being, The Smart City Project, with a plan to build 100 smart cities, is an excellent chance for real estate companies. To renew nearly 1,600 stalled housing projects across top cities in the country, the Union Cabinet has supported the setting up of Rs 25,000 crore (US$ 3.58 billion) alternative investment fund (AIF). Under Pradhan Mantri Awas Yojana (Urban) (PMAY (U)), 1.12 crore houses have been sanctioned in urban areas, producing 1.20 crore jobs. The government has created an Affordable Housing Fund (AHF) in the National Housing Bank (NHB) with an initial investment of Rs 10,000 crore (US$ 1.43 billion).
On February 29, 2020, India approved 417 special economic zones (SEZs), of which 238 were in operation. The majority of the SEZs are in the IT sector. The Government of India is foreseen to invest in the infrastructure sector, like highways, renewable energy, and urban transport. In 2019, the sector saw seven mergers and acquisition (M&A) deals worth US$ 1,461 million. In March 2020, NHAI accomplished the highest ever highway construction of 3,979 km of national highways in 2020. The largest private equity investment observed was the acquisition of Pipeline Infrastructure India by Canadian asset management firm Brookfield’s for US$ 1.9 billion in the first quarter of the fiscal year 2019. In May 2020, Border Roads Organisation (BRO) dug up a 440-meter long tunnel below the Chamba town on Rishikesh-Dharasu road Highway (NH 94). In the Union Budget 2020-21, the Government has given a massive investment to the infrastructure industry by allocating Rs 1,69,637 crore (US$ 24.27 billion) to develop the transport infrastructure.
The Securities and Exchange Board of India (SEBI) has given its approval for the Real Estate Investment Trust (REIT) platform, which will enable a wide range of investors to invest in the Indian real estate market. It would generate a possibility worth Rs 1.25 trillion (US$ 19.65 billion) in the Indian market in the future ahead. The housing industry is highly liable for influencing India’s overall development. Apart from housing, the infrastructure sector includes power, bridges, dams, roads, and urban infrastructure development. In 2018, India ranked 44 out of 167 countries in the World Bank's Logistics Performance Index (LPI).