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Santosh Mishra's Blog
Bihar A Real Estate Paradise
Jun 03 2012 | 3 Comments | 4335 Views

Bihar: A member of BIMARU to an attractive real estate investment destination

"Two roads diverged in a wood, and I took the one less traveled by,
And that has made all the difference"
   Robert Frost


Indian real estate sector is indeed at a crossroad and market is poised on a fine balance. Our previous blog on real estate outlook , we delved into the significant drivers that will determine its fate in 2012. While on balance we were cautiously sanguine about India's prospect, we admitted that there are several risk factors that will make a cautious investor wary of jumping right in. Mainly, as the economy as a whole has slowed down in last couple years(partially due to rising interest rate, a deliberate inflation fighting measure from RBI) the real estate sector has faced its share of hardships (see chart below).

In the face of this slowdown and continuing uncertainty it may seem like a wise decision to move away from the real estate sector altogether. However, we will advise you to think differently from the herd (or follow the dictum of Robert Frost given above) . It is almost a conventional wisdom that the big markets like Mumbai, Delhi/NCR , and Bangalore are the natural destination of real estate investment for robust long run growth. We disagree; and for good reasons. Wethink the hidden gems are smaller states/cities where the real estate growth potentialis immense. Mainly, they are not handicapped by negative demand (e.g. like foreign capital outflow and slowdown of economy leading to weakening of commercial demand) andsupply (e.g. speculative construction by builders leading to high inventory andrising creditand other costs) factors observed in more mature and bigger markets (like Mumbai and Delhi/NCR).

In this blog we focus on one of those hidden gems, namely Bihar. From the lowly member of BIMARU club (which also included Madhyapardesh, Rajsthan, Uttarpradesh, and Orissa) it has come a long way and now presents an excellent opportunity for future growth.Here are we demonstrate how the supply and demand factor come together to make its property market one of the most attractive destination for real estate investment.

Demand Factors ·

  • Booming Economy : The economy is growing at healthy clip during last five years with per capita income rising consistently and is expected to do so in the next five years (see chart below, source : Bihar Economic Survey). We will like to add that even with this growth it is less than one third of the national average, thus the scope for future growth is still immense. The chart on the right shows the property price appreciation in Patna (source: NHB) , and observe how it has weatheredadverse macroeconomic shock admirably. This highlights a key feature of the small real estate markets: they are more immune to external shocks and more driven by local factors. Combined with the economic outlook and growth potential the housing market is only going benefit in the long run.


  • ·Improvement of other socio economic factors: Following are some of the other factors that has improved which will positively boost demand:
    • Law and Order: Law and order has improved significantly (Plot given below shows the number of murder, Dacoit, and burglary statistics over time) which will allow the outsiders to move into Bihar and generate fresh demand in the housing market. It will also create a safe cities, a key pre-requisite for strong long term growth.
    • Education: Better education leads to higher productivity (and better income) that is conducive for the overall economic growth.
    • Internet penetration: Sustained growth from 2006 onwards. It is one of the most potent sources of information, and higher usage will have a positive impact on the economy and real estate sector.
  • ·New Household Formation and Migration: Economic growth (especially from a low base observed in Bihar) is usually accompanied by rapid industrialization and an increase in rural urban migration. This is often associated with formation of new households. The big joint families in the villages give way to smaller families that move to the cities for better job opportunities. This will create additional demand for housing in the urban centers. As such urban areas suffer from housing shortage (for India as a whole urban housing shortage has grown from 15 million units to 20 million units between 2001 and 2010, source: CRISIL research), it will further boost future real estate growth. ·
  • Investment from Abroad: No, here we are not talking about foreign equity investment; we are talking about NRI investing in their homeland. As the socio economic condition improves and housing market appears more attractive, the Bihar Diaspora will see investing in home state as emotionally satisfying and economically sound strategy. As such Indian remittances from abroad has almost tripled from 2005 to 2010, reaching close to Rs. 20,000 crores, source: World Bank). This trend will continue in the future creating a positive feedback loop.

Supply factors: ·

  • Shortage: Bihar had a significant shortage of housing even before the positive economic transformation began. During the 2001 census,it was found that the housing shortage in Bihar was 38% of the number of existing households at that time (this was one of the highest in India). The plot below shows the increasing shortage under the assumption of fixed supply and existing population growth rate.We assume that any increase in supply is neutralized by new household formation (due to better economic condition and migration to urban areas). This points to a booming housing market in the future as price rise in the short run and supply increase in response to the price incentive.
  • Credit constraints: Bihar has tremendous potential for growth compared to the rest of India when it comes to banking sector. The table below provides a comparison of credit and deposit penetration in Bihar and India.The figures show that Bihar lags far behind national average in both the categories. This shortage of capital inhibits investment as a whole and also in the real estate sector.Furthermore, even with this low deposit base, the low credit deposition ratio (share of deposit used within the state for investment purpose) indicate still lower availability of funding for real estate investment (the national average is around 80% as of 2010 against only around 30% for Bihar, source :Bihar Economic Survey). This further aggravates the shortage issue we alluded to above.We expect as the economy grows this funding bottleneck will be cleared up and the state will provide greater incentive for domestic real estate investment

Looking at the demand and supply factors we see more reason to be optimistic about the Bihar housing market. As the economy grows at a faster clip and the supply and other regulatory bottlenecks are cleared up we will expect to demand and supply to grow at a strong rate. We want you to move in now and enjoy a long run benefit from investing in real estate there.


  • By Sagarika Mishra, Oct 11 2012
    very nice analysis.
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