RealMoney Silver - A Closer Look at What's Driving India's Real Estate

A Closer Look at What's Driving India's Real Estate
By Jay Somaney
RealMoney.com Contributor
3/27/2008 10:06 AM EDT

Thanks to all of you for your overwhelming response to my article on Indian real estate investment trusts. I hope I have not missed replying to any of your emails. My inbox was completely overwhelmed. If I have failed to respond to any of your emails, please resend them to the email address at the end of the article, and I will reply immediately.

I got so many questions from you about what is driving the demand for both commercial and residential real estate, what the rates of returns have been and will be going forward, and what the investment horizon will be that I decided to take it step by step and break it down, instead of penning a tome.

I am going to begin with the main growth driver for commercial office space in India for the next few years, which is the IT/ITES/BPO sector. (The acronyms stand for information technology, information technology enabled services and business process outsourcing.) Take a look at the following eye-popping numbers from none other than NASSCOM, the representative association for the IT/ITES/BPO sector in India.

In 2005, commercial office space occupied by the IT/ITES/BPO sector was about 90 million square feet.

The following year, it increased by 20 million square feet to about 110 million square feet.

Last year, the increase in demand by that sector alone was an additional 27 million square feet.

In 2008, incremental demand is forecast to be an additional 41 million square feet.

NASSCOM is estimating 2009 new commercial office space demand to increase 47 million square feet.

Finally, the industry trade body is saying incremental space required by the IT/ITES/BPO and ancillary sectors such as restaurants, hospitality, etc., will increase to 53 million square feet.

That is 140 million square feet (rounding it off) of required buildout in commercial office space by this sector alone in the next three years.

You might have been hearing a lot of noise in the press and from the hand-wringers about real estate bubbles in India, China and everywhere else but here. However, the facts tell a totally different story. For instance, in the National Capital Region (or NCR, as the region around the Indian capital of Delhi is known) has seen commercial office lease rental climb by 15%-20% in the last two quarters. Pune has seen lease rental rise by almost 40% in the last couple of quarters, and Hyderabad has seen an increase in rental inflows of about 32%.

What stock market crash? Everyone and their dog knows that there has been absolutely no change to the India growth story from a fundamental basis. What has changed is the thought-numbing global fears of a recession stateside plunging the world into darkness. Two words: not happening.

India is probably the best-insulated economy out there, and it has a very strong and growing rate of internal consumption. Aside from a few export-oriented sectors that may face some near-terms issues, the India story remains totally intact. Yes, yes, I know, the world is coming to an end. I say the same thing daily and twice on Sundays: The Indian growth story remains intact at least for the foreseeable future, especially when one looks at investing there with a long-term horizon in mind.

Until the next time, happy investing.

For those of you that might have seen your emails go unanswered, please zap me at jay@globaltechstocks.com.