India's construction sector levels up as housing demand spurs economy

[December 02, 2023]  By Manoj Kumar

NEW DELHI (Reuters) - If India needed any more proof that it was in the midst of a huge housing boom, it got in this week's GDP data, heightening expectations that the industry will continue to power the economy for years to come.

The construction sector grew 13.3% in July-September from a year earlier, up from 7.9% in the previous quarter and its best performance in five quarters, the data released on Thursday showed.

That helped India expand at a forecast-beating 7.6%, making it one of the world's fastest-growing major economies. In contrast, Western economies have been squeezed by high interest rates and energy prices, while China has been hobbled by a debt crisis in its property sector.

The long-awaited boom - which has created millions of jobs - comes after about six years of debt and pandemic-induced downturn before the construction sector began improving last year and hitting its stride this year. It has been driven by rising incomes for many Indians, a severe housing shortage in big cities and strong population growth.

The world's most populous nation had an urban housing shortage of around 19 million units last year - and that is expected to double by 2030, according to government estimates.

"The robust growth in construction has significantly contributed to the economic growth - and is likely to play the same role in next couple of quarters," said Sunil Sinha, an economist at India Ratings and Research, an arm of rating agency Fitch.

Builders are bullish long-term with many saying the boom could last two to three years and some even more optimistic.

"The housing market could continue to perform well for another three to four years," Sanjeev Jain, managing director at Parsvnath Developers, a leading real estate company, noting that India is in the initial stages of a housing growth cycle.

Home sales in India's seven largest cities, including Mumbai, New Delhi and Bangalore, rocketed 36% in the July-September quarter from a year earlier to more than 112,000 units, despite an 8%-18% increase in prices, according to real estate consultancy Anarock.

There was also a 24% increase in new residential projects being launched, data from the consultancy showed.

A general view of high-rise residential buildings amidst other residential buildings in Mumbai, India, December 1, 2023. REUTERS/Francis Mascarenhas

"The home sales are driven by first-time buyers, and nearly 80% of the houses have been bought by end users," said Prashant Thakur, head of research at Anarock, adding that there was also strong demand from existing home owners to move to more spacious apartments.

In Mumbai, for example, demand has been strong despite an increase in interest rates of about two percentage points, according to Jayesh Rathod, director of Mumbai-based Guardian Real Estate Advisory.

His company has sold over 5,500 flats in Mumbai and on its outskirts in Thane so far this year, a jump of more than 50% compared to the same period a year ago, he said.

Underpinning demand has been salary hikes for workers in big cities. Average hikes for sectors such as e-commerce, healthcare, retail and logistics have remained above 10% for a second straight year, according to EY estimates.

Home prices in India are expected to rise faster than consumer inflation next year, according to a Reuters poll, with property analysts saying growth will be driven by higher earners snapping up newly built luxury residences in cities.

Housing demand has also picked up significantly in smaller cities in the southern states of Tamil Nadu, Karnataka and Prime Minister Narendra Modi's home state of Gujarat, according to construction companies who say demand has been spurred by increases in incomes and the migration of workers from rural areas.

The government is also trying to boost the availability of affordable housing by providing subsidies, which is encouraging construction in India's smaller towns and cities.

Shares in property companies have naturally surged.

The Nifty realty index is up some 67% for the year to date compared with a 12% gain for the blue-chip Nifty 50 index.

Notable gainers include Prestige Estates Projects which has jumped some 120%, DLF which has climbed 67% and Godrej Properties which is up 52%.

($1 = 83.3143 Indian rupees)

(Reporting by Manoj Kumar, Additional reporting by Nigam Prusty; Editing by Ira Dugal and Edwina Gibbs)

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