Banking on bricks: The real story behind India's real estate boom

Growth drivers in real estate include urbanisation, disposable incomes, and demand for residential, commercial, and logistics spaces, according to a Business Standard-Knight Frank report

India's real estate sector, significantly buoyed by a robust economy, has emerged as a pivotal player in the country's development. With an 18 per cent share in national employment, real estate is the largest employment generator after agriculture. Currently valued at $493 billion, the sector contributes 7.3 per cent to India's gross domestic product (GDP). Our projections indicate this to increase to Rs 5.8 trillion by 2047, or 15.5 per cent of India’s economic output. Key growth drivers include rising urbanisation, increasing disposable incomes, and heightened demand for residential, commercial, and logistics spaces, besides a growing need for data centres fuelled by advances in the space.

   

Role of BFSI in real estate growth

 

The banking, financial services, and insurance (BFSI) sector plays an instrumental role in supporting the expansion of the real estate sector. It facilitates essential financing for home buyers through mortgage products and offers capital to developers via construction finance and lease rent discounting. Also, insurance products, including title and property insurance, help mitigate risks throughout the real estate lifecycle. Mutual funds also enhance access to real estate for retail and institutional investors through real estate investment trusts (Reits) and real estate mutual funds (REMFs).

 

Trends in residential real estate

 

The residential real estate market has experienced a post-pandemic resurgence, driven by shifting buyer preferences. Notably, the share of the affordable housing segment — homes priced below Rs 50 lakh — has reduced from 54 per cent of total sales in 2018 to 26 per cent in 2024 — due to rising prices. Conversely, properties of higher value — those priced above Rs 1 crore — have seen a surge from 16 per cent to 43 per cent during the same period, reflecting affluent buyers’ preference of premium offerings. Mid-range properties (Rs 50 lakh to Rs 1 crore) have remained stable, consistently accounting for 30-37 per cent of total sales.

 

According to Knight Frank Research, 80 per cent of respondents to a survey of 1,629 home buyers across India's Tier-I cities favour home ownership, although this preference drops to 71 per cent among Gen Z, who seem more inclined to renting. The motivation for home purchase varies: 37 per cent seek upgrades, 32 per cent are first-time buyers, and 25 per cent invest in property. Location is a critical factor for 50 per cent of buyers, followed closely by property size (45 per cent) and price (45 per cent). Competitive interest rates and flexible loan options are crucial for 74 per cent of home buyers, with 79 per cent relying on home loans, even as wealthier buyers also leverage personal savings.

 

Stamp duty reductions, particularly in high-value markets like Mumbai, have effectively boosted property registrations. The Maharashtra government's temporary stamp duty cuts during the pandemic led to a notable surge in transactions, especially for homes valued above Rs 5 crore, underscoring the positive correlation between tax relief and high-end property sales.

 

A significant 67 per cent of respondents expressed a preference of under-construction properties to avoid any rise in prices as the project proceeds, and to avail of customisation potential, despite a 5 per cent goods and services tax (GST) on such properties. Ready-to-move-in homes appeal to 17 per cent, while only 2 per cent opt for resale, highlighting a strong demand for new developments.

 

Buyer priorities and market insights

 

The survey reveals a strategic and practical home-buying approach, balancing affordability, and long-term investment potential. Urban centres are favoured for their connectivity, employment opportunities, and amenities. Essential facilities prioritised by buyers include health care (58 per cent), retail outlets (53 per cent), public transport (40 per cent), 24x7 security (36 per cent), and green spaces (37 per cent).

 

Commercial real estate dynamics

 

Office sector growth: India’s commercial real estate market is currently buoyed by strong GDP growth, urbanisation, favourable government policies, and an evolving workspace landscape. The office segment has seen transactions involving nearly 53.7 million square feet of space in the January-September period of 2024, a 27 per cent increase over the same period last year. This growth is primarily driven by global capability centres (GCCs) and India-facing businesses, which are seeking modern office spaces to accommodate their expanding operations. Demand is further enhanced by flexible work arrangements that require adaptable and innovative workspace solutions.

 

With the trend of hybrid working picking up, many organisations are reassessing their real estate strategies, leading to a focus on sustainability and technology integration. As a result, developers are increasingly incorporating green building standards and smart technology in their designs to attract tenants who prioritise sustainability and operational efficiency.

 

Retail sector transformation

 

India’s retail sector has emerged robustly from the pandemic, experiencing a renaissance characterised by “revenge shopping”, influencer marketing, and targeted campaigns aimed at Gen Z consumers. Retailers are now focused on creating unique and immersive shopping environments, redefining the brick-and-mortar experience. The landscape boasts an array of physical stores spread across various geographic locations.

 

Economic growth, increased employment opportunities, higher disposable incomes, and the expanding reach of e-commerce into smaller cities have positioned these regions as the next growth fulcrum for the retail real estate sector.

 

> Shopping centres: As of 2023, India had a total shopping centre stock of 125 million square feet across 340 operational assets in 29 cities. These included the top eight markets of Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai, the National Capital Region (NCR), and Pune. The shopping centres encompass institutionally owned assets across all grades. Tier-I cities have historically led real estate development — residential, office, and retail — accounting for 75 per cent of the total gross leasable area of the 11.6 million square metres across 263 shopping centres. Among these, NCR, Mumbai, and Bengaluru dominate the rankings in terms of gross leasable area. Within Tier-II cities, Lucknow has emerged as a key player, accounting for an impressive 18.4 per cent of the gross leasable area among counterparts. Other notable Tier-II cities contributing significantly to the shopping centre stock include Kochi, Jaipur, Indore, and Kozhikode.

 

> High street stores in top 8 markets: Of the 82 per cent of stores located in the top eight cities, NCR (23 per cent), Bengaluru (18 per cent), and Hyderabad (15 per cent) lead in store numbers. Mumbai accounts for 13 per cent of the total number of stores in these cities. Certain high streets in Bengaluru, Mumbai, and NCR offer a shopping experience that shopping centres cannot replicate. The early introduction of modern retail, along with organised retailing and mega retailer expansion, has imbued these locations — such as Brigade Road, Indiranagar, Colaba Causeway, Connaught Place, and Khan Market — with a unique character. These high streets are renowned for their mix of regional and international showrooms and enjoy a loyal customer base. In these three cities, the real estate footprint of international brands ranges between 13 per cent and 15 per cent, significantly higher than in other regions.

 

> Warehousing growth: The warehousing segment is vibrant, driven by the rise of e-commerce, supply chain optimisation, and the decentralisation of global production. Transaction volume is primarily led by the manufacturing sector, accounting for 36 per cent of demand, followed by third-party logistics providers and e-commerce firms. Industrial parks near urban centres are in high demand, emphasising the need for efficient logistics infrastructure.

 

Investment trends and opportunities

 

Real estate investment in India has experienced transformative growth, with Reits and private equity (PE) capitalising on diverse opportunities. Since their inception in 2014, Indian Reits have gained traction, with Embassy Office Parks listing in 2019, followed by Mindspace, Brookfield, and Nexus Select Trust Reits, collectively managing 114.5 million square feet of assets. Reits now represent 11.9 per cent of India's office market, with significant growth potential, as demand from GCCs and domestic enterprises rises. Upcoming retail and industrial Reits, driven by warehousing needs and e-commerce growth, signal expanded investment avenues.

 

PE plays a crucial role in the sector, with cumulative investments reaching $75.7 billion since 2004. Recent trends show a shift toward warehousing, with $1.5 billion invested in this sector in the January-September 2024 period. Residential assets are witnessing renewed interest from domestic investors, while office investments have seen a moderate decline.

 

Financing landscape in real estate

 

Indian banks and non-banking financial companies (NBFCs) are vital in financing the real estate sector. Bank housing loans surged from Rs 6.3 trillion in 2015 to Rs 28.3 trillion by August 2024, driven by rising demand for housing. Commercial real estate loans exceeded Rs 4.9 trillion, as banks cautiously expanded their wholesale portfolios. NBFCs provide flexible financing for smaller projects, even amid tighter regulations promoting prudent lending.

 

Developer financing remains critical for project success, covering all stages from land acquisition to completion. Knight Frank’s developer interviews reveal challenges in securing funding, particularly for land acquisition due to RBI circulars that restrict bank lending for this purpose. Developers often resort to high-cost alternatives like Alternative Investment Funds (AIFs) or private equity. Proposed solutions include track record-based interest rates tied to developer credibility and dedicated land financing products to lower costs for reliable developers.

 

Another significant challenge is the high cost of loan security registration and stamp duty, with some states levying as much as 2% stamp duty on loan amounts. A rolling security structure or Master Facility Agreement could reduce these costs by enabling developers to reuse existing security for multiple loans, minimising redundant transaction expenses and benefiting affordable housing projects. Together, these solutions create a cost-efficient, developer-friendly financing landscape, supporting sector growth and affordable housing development.

 

Title insurance

 

Title insurance, essential in safeguarding property ownership, remains in its early stages of adoption in India. It protects property buyers and lenders from losses due to title disputes, a critical need, given India’s land record issues. To promote its adoption, India could enhance its regulatory frame­work by adopting standards from the American Land Title Association (ALTA) model, implement awareness campaigns with real estate professionals, and leverage technology, such as blockchain, for transp­arent records. Integrating title insurance with mortgage products and developing region-specific, flexible products could further broaden reach and increase consumer trust in this vital product.

 

Emerging technologies’ juxtaposition with real estate and BFSI

 

Emerging technologies like artificial intelligence, virtual reality, augmented reality, Internet of Things, and fintech are revolutionising the real estate sector, delivering significant benefits to both real estate and the BFSI sectors.

 

> AI and predictive analytics: Enhance property valuations and automate mortgage processes, leading to faster, data-driven decisions and risk mitigation.

 

> Virtual and augmented reality: Facilitate immersive property tours, attracting a broader range of buyers, including international investors.

 

> IoT integration: Optimises building management and enhances tenant satisfaction, allowing for better asset valuation and operational efficiency.

 

> Fintech solutions: Streamline transactions, improve fraud detection, and automate regulatory compliance, reducing administrative burdens for financial institutions.

 

Together, these technologies foster growth, improve customer experience, and create a more dynamic real estate market, benefitting stakeholders in both sectors.

 

Infrastructure and real estate

 

Over the past decade, India has experienced significant growth in infrastructure development, spurred by substantial investments from both central and state governments. Key initiatives like the National Infrastructure Pipeline (NIP), public-private partnerships (PPPs), and innovative financing tools like infrastructure investment trusts (Invits) have facilitated project execution and issue resolution. Major policy initiatives like Bharatmala and Sagarmala aim to enhance connectivity and economic growth, with the NIP alone targeting an investment of $1.6 trillion from 2020 to 2025.

 

Capital expenditure on core infrastructure has notably increased from 0.5 per cent of GDP in 2013 to 2.2 per cent in 2023, with the length of national highways expanding by 48,154 kilometres. This progress has improved India's logistics performance, as reflected in its rise from 54th to 38th in the Logistics Performance Index. However, logistics costs remain high, necessitating further investments.

 

Infrastructure development not only enhances connectivity but also catalyses real estate growth, transforming land use and spurring commercial and residential development. The potential for infrastructure funding remains significant, although private sector participation has been limited due to various challenges, including project delays and underperformance. 

 

Domestic lending institutions, particularly banks and NBFCs, currently play a crucial role in financing infrastructure, but their exposure is low compared to overall investment needs. Additionally, untapped financial products, such as pension funds, present opportunities for substantial investment in infrastructure. As India aims for a developed economy status by 2047, a continued emphasis on favourable policies, aggressive infrastructure investments, and the effective utilisation of diverse financial instruments will be vital in addressing financing challenges and ensuring timely project completion.