Getting real about failed monsoon

By: Subhankar Mitra, Head – Strategic Consulting (West) Jones Lang LaSalle India

The annual monsoons have always been perceived both as a rural blessing and an urban curse – they are good news for the agrarian sector and the bane of water-logging prone cities. However, this caricatured mind-set is breaking.

The threat now looming both over villages and cities of two-thirds of the nation’s districts is a drought-like situation. Cities and towns are reeling under water shortages that threaten to get worse, and the economies of agrarian rural areas are held hostage.

These adverse effects of a failed monsoon are self-evident – what is less obvious is the impact it can – and probably will – have on the already compromised real estate sector. After all, the fate of India’s property markets is not directly linked to the availability of water or rainfall… or is it?

It is important to understand that the health of the real estate market is directly connected to the nation’s larger economic framework. Therefore, it is subject to any changes in the macro environment.

Agriculture contributes to only about 18% of India’s GDP. However, almost 50% of our population directly or indirectly depends on this sector, which is by far the largest employer in India. Expert analysts expect India’s GDP growth will hover around the 6% mark for this year.

India has been battling hard to get back onto an 8-9% GDP growth rate since the global financial meltdown reared its malevolent head back in 2008. This new forecast is not geared towards improving the macro-economic situation – to which market sentiments are inextricably linked – despite the fact that the world seems to be inching past the worst phase of economic crisis.

The impact of a failed or inadequate monsoon is multifold. First, a vast segment of marginal farmers are rendered jobless and tend to migrate to urban areas for subsistence. These migrations add to the burden of already strained civic infrastructure of these cities. Shelter becomes a critical issue for such migrants, and many of them flock to the city slums as they cannot afford anything on the formal real estate market.

The rentals for residential space tend to move upwards as mitigation of supply constraints is compromised in the short term. Nevertheless, capital values will not gain significantly – owing largely to currently reduced disposition for owning real estate asset, and the high interest costs.

Inflationary pressures cause retail spends to dip and the prices of commodities to move upward, leaving consumers with little money to spend on capital goods – including housing. Retailers curtail their expansion plans due to lowered revenue growth perceptions, affecting the retail real estate sector to feel the heat. Similar effects will be seen on the leisure and entertainment sector – a not inconsiderable consumer of real estate.

The only winner in this grim phase may be the services sector, and its contribution to the commercial real estate sector. Global economic recovery is picking up, and international demand has started showing sign of revival. This will result in improved export performances of India’s SEZs. This sends out a clear message – a turnaround for the commercial real estate sector can only take place by hand-holding the services sector.