A sector under siege? War and real estate: Navigating uncertainty in India's expanding market

I was a little surprised when I received an email alert from a top real estate consultant, Anarock Group, titled "Exploring War’s Effects on Indian Real Estate—When Conflict Meets Concrete," authored by its regional director and head of research, Dr. Prashant Thakur. I had thought that the business would wholeheartedly support what is considered a strong response to the dastardly terrorist attack in Pahalgam, Operation Sindoor. 

India's businesses, I thought aloud, would see it as an opportunity to expand their wings across South Asia and beyond once India wins the battle, which seems likely, given Pakistan's relatively weak defenses. 

However, here was a researcher from a real estate consulting firm sowing doubts over the Indo-Pak war's impact on a sector that it claims is expanding faster than all others. A recent Anarock report stated that real estate attracted the highest investment in 2014—16%—followed by power at 12%, metals and mining at 11%, banks at 8%, and so on. Of the total Qualified Institutional Placements (QIPs) issuance across sectors in 2014, worth Rs 1,41,482 crore, real estate was a dominant contributor, raising Rs 22,320 crore—accounting for a 16% overall share. 

The trend, if Anarock is to be believed, continues this year as well. Thus, detailing what are known as Alternate Investment Funds (AIFs), which "provide access to niche investment opportunities with higher risk-reward potential, making them attractive for sophisticated investors," one of its reports states that real estate this year attracted the highest share—15%—of the total Rs 5,06,196 crore AIFs, amounting to Rs 73,903 crore, followed by IT/ITES at 6% (see image).

Dr. Thakur's "research," based on past wars, suggests the immediate future may be bleak, as battle lines between India and Pakistan appear to be escalating. He asserts that war rarely leaves anything untouched, stating that while one "may not necessarily be talking about decimated buildings—though those must be factored in within the actual conflict zones—armed conflicts generally have a negative effect on economies."

According to Dr. Thakur, wars "stall construction and dampen end-user and investor confidence. Aspiring homebuyers put decisions on hold, retailers pause expansion plans, and tourists postpone their travel plans." However, taking a positive view—which is natural for any businessperson to publicly express—he states, "Real estate markets adapt, pause, and then bounce back."

Nonetheless, he notes that during wars, there is "reduced end-user and investor confidence," with homebuyers delaying purchases, businesses deferring office leases, and investors seeking safer havens like gold (and, these days, cryptocurrencies). Additionally, raw materials, especially key inputs for construction such as steel and cement, "may be diverted to fortify the country's defense infrastructure and/or experience steep price hikes."

Further, during wars, governments "spend more on the military and reduce spending on infrastructure and consumer real estate," even as capital values take a hit, with housing capital values declining "due to lower demand."

Referring to India's last two significant military engagements—the Indo-Pak war of 1971 and the Kargil war of 1999—Dr. Thakur states, "We saw this process unfold in all four critical real estate sectors: residential, commercial, retail, and hospitality."

According to him, "The 13-day conflict in December 1971 did more than redraw India's borders—it brought the country's economy to a virtual standstill. There was a huge dip in GDP growth—from 5.4% in FY1970 to 1% in FY1972. Simultaneously, inflation spiked beyond 11%, and construction was largely restricted to military sites."

Dr. Thakur notes, "In the financial capital of Mumbai—then Bombay—the state government imposed strict controls on cement and steel, leading to a 12% reduction in housing project approvals. Thankfully, rent control laws remained unyielding, so rental rates did not spike even as inflation soared."

Further, "Not surprisingly, property registrations in the city decreased by almost 10% in 1971. Locations such as Mumbai's Fort area and Delhi's Connaught Place saw massive vacancy rates." Additionally, "Local shops in Old Delhi and Kolkata saw a significant drop in footfalls. According to available court records from 1971, shop rent disputes in Mumbai increased by 18% due to heightened tenant stress."

Dr. Thakur adds, "Unsurprisingly, tourism in India was impacted by the war. Foreign Tourist Arrivals (FTAs) declined from 2.02 million in 1970 to 1.96 million in 1971. In Delhi, hotel occupancy dropped below 45%, and even the hospitality major of the day—the Indian Hotels Company—saw revenues plummet, especially in areas directly affected by the war, particularly Srinagar."

As for the 1999 Kargil war, Dr. Thakur states it had "a short but harsh impact... The Kargil standoff, which lasted three months, resulted in considerable short-term market panic." However, since India's economy was "liberalized and far more resilient by then," it "recovered quickly." Referring to the housing market, he notes that while in 1999 India's real estate market was already suffering from the Asian financial crisis, housing rental values took a direct hit.

Thus, "In Delhi and Mumbai’s prime residential locations, rental values plummeted by 3–8% over those three months, bottoming out by the end of 1999." Yet, ironically, "despite the conflict and its ramifications, luxury apartments in Mumbai's Cuffe Parade still commanded handsome prices of INR 20,000–23,200/sq.ft."

Coming to the latest round, Dr. Thakur opines, "If the current conflict broadens, we should be prepared for certain ramifications." He predicts, "Residential absorption in Delhi-NCR and other parts of north India may witness a short-term dip of 5–10%. Luxury homebuyers tend to delay purchases in periods of uncertainty."

Despite all this, Dr. Thakur remains optimistic: "Wars may temporarily slow sentiment and freeze decisions, but they cannot break India's real estate market... There may be short-term sluggishness, but no outright plunge."