"How Will Real Estate Market Deal With Urban Influx In 2020 by Arvind Nandan Managing Director- Research and Consulting, Savills India"

by Shrutee K/DNS

Urbanisation in India, mainly powered by rural to urban migrations, has been on the rise. At approximately 34%, India is today urbanising at a faster pace than at any other time in the past. It is a high-impact process, which is significantly altering patterns of economic activity in cities, as well as the land-uses. Although the process has been on for the past 50-60 years; it has picked up pace in the last two decades. The UN had assessed a few years ago that over 70% of the world population will be urbanised by 2050. It is also worth noting that the biggest rural population was in India and China. With an urban population of about 40-42 million today, which will increase significantly over the next 10 years, India’s cities need to gear up in a major way. 

The first sign of increased densities in India’s urban centres is raising land prices and the clutter of real estate developments within the city limits. The pressure on infrastructure is a manifestation of the same. As per our assessments at Savills Research, most of our cities have much lower commercial space to resident-household ratios (in the range of 20-40 sq.ft. per household), than global cities of repute. This measure can prove to be a vital indicator, as it reveals urban imbalances and under-capacities. It is not surprising that pressures of this nature make housing development the most challenging proposition in our cities, as pricing-dynamics become increasingly loaded in favour of high-end products.

In the last couple of years, the realisation of achieving the right pricing has led to several modifications in housing products. The first major transformation was the contraction of housing-size. This ensures, to some extent, a housing product which is closer to desirable ticket-sizes. Further, innovative construction plans and designs have begun playing an important role. A critical part is being played by enabling-ecosystem which regularly tried adapting itself, such as, by calibrating GST levels to ensure viable product pricing. However, there remain several uncertainties which need further attention. As 2020 rolls on, a substantial amount of action is expected on combined fronts, in order to increase market activity in the housing sector. 

In this regard, it is critical to note upfront that the housing for all does not depend merely on sale-purchase of houses in urban locations, but on a robust leasing market as well. The Model Tenancy Law would play a major role in this decade if implemented with clarity. There are numerous unresolved areas to make it workable, such as those pertaining to taxation and poor returns from housing-investments. These need to be solved by the use of sound processes. Also, the allowance of large unused land-parcels for development of rental housing will be critical. 

Secondly, in our megacities, a hike in average prices is currently unviable. Central Business Districts (CBDs) and other major commercial centres have witnessed increasing commercial activity as noted in our 2019 year-end Market Watch, which creates a pressing need for housing at optimal travel-times from these hubs of economic activity. 

As a result, these cities and their peripheries are in constant need of high volumes of investments, for combatting the challenges of space crunch as well as infrastructure augmentation. By ballpark estimates India’s urban centres may need over USD 1-trillion of investments for upgrades. 

Thirdly, it is evident that migrations into urban centres cannot be accommodated endlessly within the existing seven or eight large cities. Creation of new urban centres is imperative. The start of the new decade provides a great opportunity to begin work on the rejuvenation of several smaller urban centres as well as creating new ones. Several metropolises have already been expanding into nearby areas and expanding capacities. Mumbai has now expanded to neighbouring regions such as Navi Mumbai, Neral, Karjat, Kharghar, Khopoli, etc and is moving towards greater integration with Pune’s western periphery. Bangalore has similarly been constantly expanding and increasingly integrating with Mysore. The micro-markets around NCR, which were earlier remote, have now developed and increasingly become its integral part. However, the process has been mostly organic and occurred over several decades. The speed at which our cities will need to accommodate populations does not allow the luxury of organic expansions. We must develop them at a very rapid pace.

As our established commercial and economic centres continue to record high-level office absorptions – as they did in 2018 and 2019 – despite a slowing economy, we must realise that the tertiary sector activity remains well-heeled. This is highly likely to create continued attractions for migratory populations. This, in fact, is a positive aspect, and something that gives us enough reason to urgently upgrade our cities. The only challenge is to act now and to keep up the pace.