India, home to 1.4 billion people, has become self-sufficient in recent decades when it comes to two of life’s three basic necessities: food and clothing. But when it comes to the third basic need, housing, the country still lags behind. With the rapid urbanization of the past decade, a trend that is expected to intensify over the next decade and a half, the need for housing looks set to increase. The first signs are already visible as major urban centers across India are witnessing an increase in home sales, implying the potential start of a bull cycle in housing.
Various factors indicate that housing should gain in the times ahead. Thus, for a savvy investor, housing as a theme appears as a promising investment opportunity that deserves to be considered given the opportunities that the sector offers at this stage. Additionally, current reasonable valuations given modest land and building gains since 2013 have led to a time correction in physical assets, making the sector even more attractive.
Other than that, here are some of the growth drivers in the housing sector:
Population growth :
India’s population is expected to grow through 2050 to over 1.7 billion. It just means more houses are needed. In addition, a rising trend of nuclear families could further push housing demand.
Urbanization: While the global average is 54%, the urban population in India is only 35%. Even compared to emerging economies like Indonesia (57%), China (61%) and Brazil (87%), India lags far behind. This indicates that there is immense potential for an increase in the urban population. Driving this trend is access to higher education, non-remunerative agriculture and infrastructure development.
Over the past decade, India’s urban population has grown 3.4 times the rural population growth. It is estimated to increase more than fivefold over the next decade. Of the current 400 million, the urban population is expected to reach 525 million by 2025 and 600 million by 2036.
Government push: The government’s focus on affordable housing under the ambitious Pradhan Mantri Awas Yojana (PMAY) is an attempt to provide housing for all. For the current financial year, the PMAY allocation increased by 75% to Rs 48,000 crore from Rs 27,500 crore in the previous financial year. Also, capital expenditure for infrastructure development has been significantly increased to Rs 7.5 lakh crore from Rs 5.54 lakh crore. These stimulating factors are likely to energize the housing sector.
Demography: India’s strong demographics are conducive to housing growth. The country is expected to experience a higher working population and a lower dependent population over the next three decades. This implies an increase in household income. The impact of favorable population demographics is likely to support the housing theme in the years to come.
Demand exceeds supply: The surge in home sales in seven major Indian cities by a whopping 113% signifies an upturn in the housing cycle. It also indicates that the 2008-12 oversupply situation in the real estate sector is being digested as demand has eclipsed supply since 2017. The trend could lead to less price pressure from real estate, which would act as a catalyst for the housing theme.
Easy financing despite low penetration: India’s low penetration in the mortgage segment, which accounts for only 10% of nominal GDP compared to 30-90% of its global peers, suggests the vast growth potential available. Ease of financing, coupled with historically low home lending rates, may play a key role in increasing the mortgage segment, which could boost housing demand.
Wealth effect and affordability: Real estate is no longer seen as the choice of the elite. The substantial increase in the earning capacity of individuals has made housing affordable for the masses.
The cumulative benefits of all these factors will push Indian real estate to new heights. The sector is estimated to surpass the $500 million mark by 2025 and cross the $1 trillion mark by 2030. It should be noted that housing is a broad theme that fuels the growth of several other sectors like cement, steel, electrical appliances, paints, pipes, sanitary ware, tiles, housing finance, education and pharmaceuticals, among others.
In a nutshell, the housing theme is expected to generate many investment opportunities that should be tapped through the ICICI Housing Opportunities Prudential Fund. The fund aims to invest in all sectors likely to benefit from the recovery of the real estate cycle. Indeed, this fund is a one-time investment in which an investor can make the most of the recovery in the housing cycle.
— The author, Pankaj Ladha, is the founder of InvestAajForKal. The opinions expressed in this article are personal.