The year 2023 started with high expectations to achieve stability amid global macroeconomic uncertainty and geo-political conflicts. Amid global headwinds, India’s GDP growth rate outshined major developed economies of the world, strengthening the growth prospects of the nation. The resilience of the Indian economy along with strong fundamentals reflected in the real estate market during the year.
Union Budget 2023-24 with Strong Emphasis on Infrastructure Development
The Union Budget 2023-24 listed seven priorities such as inclusive development, reaching the last mile, infrastructure and investment, unleashing potential, green growth, youth power, and the financial sector, to guide the nation through ‘Amrit Kaal’. With a strong emphasis on infrastructure development, the budget had laid outgrowth plans, including the establishment of the Urban Infrastructure Development Fund (UIDF). This fund is being managed by the National Housing Bank and utilized by public agencies to create urban infrastructure in tier-2 and tier-3 cities. This boosted the real estate market in smaller cities in India.
A sum of INR 75,000 Crs has been allocated for one hundred crucial transport infrastructure projects to enhance last and first-mile connectivity, particularly for the ports, coal, steel, fertilizer, and food grains sectors. Additionally, the budget enhanced the outlay for PM Awas Yojana by 66% to over INR 79,000 Cr. This boosted the demand for affordable housing across the country, benefiting first-time home buyers.
Mega Infrastructure Projects Propelled Growth in the Indian Real Estate Sector
The government’s constant push for rapid infrastructure development laid the foundation for sustained real estate growth during the current year. Mega infrastructure projects such as Smart Cities, Bharatmala, Sagarmala, Gati Shakti projects, Bullet Train, Navi Mumbai International Airport, Mumbai Trans Harbour Link, Metro rail projects in several cities, and the Delhi-Mumbai Industrial Corridor (DMIC) are leading rapid urbanization, providing impetus to real estate assets in India. Additionally, improvement in transportation network reduced logistics cost, benefitting businesses across sectors.
Lull to Boom, Indian Office Market Resurrected Amid Global Headwinds
The office sector in the first quarter of 2023 started with subdued demand and limited new completions amid mass layoffs and the looming fear of recession in the US economy. However, it resurrected in the second quarter as the effect of funding winter faded away and the market stabilized.
Indian businesses promptly adapted to changing work dynamics, providing necessary impetus to the office sector. As a result, absorption increased to 15.9 Mn sq ft in Q3 2023, registering the highest quarterly absorption since the onset of the pandemic. Southern cities (Bengaluru, Hyderabad, and Chennai) dominated absorption as well as new completions during the current year. While, the share of IT-ITeS sector in the overall absorption reduced during the current year, it continued to dominate.
Flexibility emerged as a key factor, leading to increased demand for co-working spaces and hybrid office solutions. In the post-pandemic era, factors such as cost-effectiveness, flexible hours, and proximity to the workplace have become crucial considerations for employees, making flexible workspaces a preferred option.
Rapid Urbanization and Infrastructure Development Transformed India’s Warehousing & Logistics Landscape
In the first half of 2023, there was a robust absorption of 15.4 Mn sq ft, constituting 49% of the total absorption recorded in the entire previous year. We anticipate the absorption to reach the levels of 2019 during the current year as the sector is growing incessantly. Moreover, Bhiwandi and Navi Mumbai micro-markets of Mumbai and peripheral areas of NCR registered heightened demand for warehouses during the current year. Despite higher demand for warehouses across the country, weighted average rentals remained largely range-bound.
The sector witnessed increased business activities on the back of a continuous rise in e-commerce and rapid urbanization in tier-2 cities. With the nation’s focus on infrastructure development and investment, warehousing sector is anticipated to remain a crucial element in India’s economic growth narrative.
Immense Enthusiasm in the Retail Sector During the Current Year
The retail sector started its year with immense enthusiasm both from mall operators and retailers as the sector was on an upswing. It was able to maintain its growth momentum throughout the year on the back of sustained demand. To leverage the current growth, several retail operators strengthened their presence in the current markets and expanded into tier-2 and tier-3 cities.
Retail leasing was at an all-time high post-pandemic and rentals appreciated across the major cities of India. Limited availability of grade-A retail space was the major reason for heightened rentals in certain areas. However, a robust pipeline of planned retail space may help create pressure on rentals in the future.
Residential Sector Continued its Upward Trend Amid Global Uncertainties
Since February 2023, RBI maintained the repo rate steady at 6.5%, keeping housing loan rates stable. This led to stable housing purchase sentiments during the year. Housing sales peaked during the year with a majority of them being driven by end-users. Moreover, Mumbai continued to be the most active residential real estate market.
The year also witnessed a significant addition to supply, driven by large and listed players. Listed residential developers expanded their footprint to new cities to enlarge their portfolio and leverage their brand value.
The residential sector registered a significant uptick in sales for affordable housing, boosted by government incentives. Moreover, the share of luxury housing has also increased in the overall sales, showcasing a major shift in consumer preferences.
Gloomy Investment Activities During the Year
The year started with the after-effect of funding winter as institutional investments declined by 20% to USD 1.2 Bn in Q1 2023 over the previous quarter. It resurrected and increased to USD 1.6 Bn during Q2 2023 but reduced significantly to USD 0.7 Bn in the third quarter of 2023. Early data collation shows the same negative trend for the last quarter as well.
In the current year, commercial assets (office space, co-working, retail, and hotels) have exhibited resilience, attracting significant investments. As the economy is performing well, it may boost the confidence of investors, resulting in increased institutional investments in the coming year.
Infrastructure, Connectivity, and Affordability Pushed Growth in Tier-2 Cities
As metropolitan cities maintained their prominence, tier-2 cities garnered traction on the back of improved infrastructure, well-established connectivity, and lower cost of living. The government’s strong emphasis on funding incubators and innovation has further catalysed the development of tier-2 cities. Moreover, flexible workspace operators in these non-metro areas have facilitated startups to operate without the burden of a substantial initial cost, leading to an uptick in demand for office spaces in these cities.
In 2023, real estate market performed and touched new heights amid all odds. As we step into the next year, real estate sector remains a key driver of India’s economic narrative, poised for continued growth.
Shrinivas Rao, FRICS, CEO, Vestian, said, “Despite an uncertain start to the year, the Indian economy and more so the real estate sector performed well. Government’s infrastructure push, increased domestic demand, corporates back to work strategies and rise in e-commerce, all contributed to the growth in the sector. While investments did not fare too well in the year, overall it has been a good year for the sector.”