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Role of the realty sector in the GDP of India

ICICIdirect 8 Mins 21 Mar 2024

The real estate industry in India is one of the most significant sectors contributing to the country's economic growth and development. It encompasses various activities related to land and property, including buying, selling, renting, leasing, and development of residential, commercial, industrial, and retail spaces. 

The Indian real estate sector has witnessed remarkable growth over the past few decades, driven by urbanization, increasing disposable incomes, and demographic changes. The market size is substantial, with domestic and foreign investors actively participating in various segments.

The real estate sector in India is subject to various regulations and laws at both the central and state levels. The Real Estate Act, 2016 (RERA) was introduced to bring transparency, accountability, and efficiency to the sector, protecting the interests of buyers and promoting fair practices. Let us look at the realty sector in India.

Factors influencing the growth of the realty sector in India

By 2040, the real estate market will grow to Rs 65,000 crore from Rs 12,000 crore in 2019. The real estate sector in India is expected to reach $1 trillion in market size by 2030, up from $200 billion in 2021, and contribute 13% to the country’s GDP by 2025. Here are the factors influencing the growth of the realty sector in India:

Economic Trends and Indicators: India's economic health stands as a cornerstone influencing the real estate market. Inflation rates, GDP growth, and employment figures significantly impact consumer purchasing power and confidence. For example, higher GDP growth rates usually correlate with increased demand for residential, commercial, and industrial spaces, driving construction activity and property prices. Fitch Ratings has revised India's GDP growth forecast to 7.8% in FY24 and 7.0% in FY25.

Government Policies and Regulatory Reforms: Initiatives like the Real Estate Regulatory Authority (RERA), Goods and Services Tax (GST), and policies promoting affordable housing and smart cities. RERA is one of the most significant regulatory reforms introduced in the Indian real estate sector. It aims to protect the interests of homebuyers and promote transparency, accountability, and efficiency in real estate transactions.

Also, the implementation of GST in 2017 has streamlined the tax structure in the real estate sector by replacing multiple indirect taxes with a unified tax regime. These reforms aim to safeguard buyer interests, improve investor confidence, and streamline the industry, thus influencing the market's growth trajectory.

Interest Rates and Monetary Policies: Interest rates directly impact the cost of borrowing for developers and homebuyers. Lower interest rates make borrowing cheaper, encouraging developers to undertake new projects and homebuyers to invest in properties. It stimulates demand in the real estate market, leading to increased sales and development activity.

Demographic Shifts and Urbanization: India's rapidly growing population and urbanization trends are deeply influencing the real estate sector. The influx of people into urban centers fuels the demand for commercial and residential spaces. Additionally, changing demographics, such as the rise of the millennial workforce and their evolving preferences, impact the type of properties in demand, pushing for more modern and tech-integrated spaces.

Real estate market in India: Pre, During and post covid

The real estate market in India has experienced significant fluctuations before, during, and after the COVID-19 pandemic. Let us look at the overview:

Pre- Covid (Before 2020)

  • Rapid Urbanization: India's real estate market was witnessing robust growth driven by rapid urbanization, demographic changes, and increasing disposable incomes. Major cities experienced high demand for residential and commercial properties.
  • Steady Demand: Demand for residential properties remained relatively strong, particularly in affordable and mid-segment housing, driven by factors like nuclear families, urban migration, and government incentives such as Pradhan Mantri Awas Yojana (PMAY).

Durning Covid-19 (2020)

  • Disruption & Uncertainty: The COVID-19 pandemic led to widespread disruption across industries, including real estate. Lockdowns, restrictions on movement, and economic uncertainty resulted in a slowdown in construction activities, disruptions in supply chains, and a decline in property transactions.
  • Financial Challenges: The pandemic exacerbated financial challenges for developers, with liquidity constraints, delayed project deliveries, and a slowdown in sales. Many developers offered discounts, flexible payment plans, and other incentives to attract buyers.

Post Covid

  • Resilience and Recovery: Despite initial disruptions, the real estate market exhibited resilience and began to recover gradually as restrictions eased and economic activities resumed. Demand for residential properties picked up, supported by low-interest rates, pent-up demand, and government initiatives like reduced stamp duty rates.
  • Rise of Digital Platforms: The pandemic accelerated the adoption of digital platforms for property transactions, including virtual property tours, online documentation, and digital payments. Real estate players increasingly relied on technology to engage with customers and streamline processes.

Contribution of real estate segment in India's GDP

The real estate sector plays a significant role in India's economy and contributes to the country's Gross Domestic Product (GDP) through various channels. India’s economy boasts a real estate sector valued at $477 billion, contributing approximately 7.3% to the country's GDP.

Future of the real estate industry in India

The future of the real estate industry in India holds both challenges and opportunities, shaped by various factors including economic trends, regulatory reforms, technological advancements, and changing consumer preferences. The growing flow of FDI in Indian real estate is encouraging increased transparency. Developers, to attract funding, have revamped their management systems and accounting to meet due diligence standards. Expected growth in the number of housing units in urban areas will increase the demand for commercial and retail office space.

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