India’s economy and its real estate market witnessed a significant downturn during CY08-09. This dispelled the myth of ‘decoupling’, which has been the cornerstone for global capital flows in India. However, India is still expected to outperform advanced economies and the overall world economic growth trend – reflecting the potential for ‘incremental decoupling’ in the times ahead. According to the World Economic Outlook Report by IMF, the world economy is likely to contract by 1.4 % during 2009. While advanced economies are expected to contract by 3.8% during 2009, emerging and developing economies are likely to grow by 1.5%. However, India and China are expected to grow by 5.4% and 7.5% respectively.

On the commercial real estate market side, capital values for commercial real estate are estimated to decline by 41% during CY08-09, after witnessing a stellar appreciation of 145% during CY04-07. Conforming to the previous recovery phase of CY03-04, initial yield is expected to show compression during CY10-11. However, unlike the previous recovery of 2003-04 when capital values appreciated by 16.3%, capital values are likely to decline during 2010 before showing recovery during 2011. Increase in yield spread or risk premium in recent months was more a result of a significant decline in yield of the 10-year Indian Government Bond (IGB) than of increase in the initial yield in real estate market. Initial yield has already started to show a declining trend during 2Q09 which is likely to be the case in the near-term.

On the other hand, yield on the 10-year IGB is likely to harden due to a higher fiscal deficit. Combined together, these factors are expected to result in compression in risk premium for the real estate market in the forthcoming quarters. Although the high fiscal deficit is likely to harden interest rates in the economy, all other macroeconomic variables are expected to improve during CY10-11 which is likely to induce real estate market recovery after the slowdown of CY08-09. India’s real estate is expected to enter the recovery phase by year-end 2009. Considering the hypothesis that global capital flows will be guided by growth and the potential for growth, economic recovery in India during CY10-11 is likely to reinvigorate the interest of foreign investors in India’s real estate market. In this perspective, enhanced capital inflow is expected in the real estate sector in the medium to long-term.

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