Will the terrorist attacks affect the Indian property market long-term?

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The various terrorist atrocities in Mumbai over the last few days have seen this vibrant Indian city pushed to the headlines for all the wrong reasons. There is some debate as to who is responsible for the attacks although as they come to an end there will be plenty of time for reflection and consideration. However, in the meantime there has been a substantial impact upon the commercial and financial area which is very prevalent in Mumbai (formerly Bombay).

While Mumbai may not be the major city in India it is still a very influential in the Indian economy and is said to account for 5% of India’s gross domestic product (GDP), 25% of industrial output, 40% of maritime trade and 70% of capital transactions within the Indian economy. The city is also one of the top 10 financial centres in the world and is central to the Indian Stock Exchange and financial sector. This is even before you begin to consider the likes of Bollywood and the massive entertainment sector which has grown up around Mumbai.

Will the terrorist atrocities have a long-term impact?

While the terrorist attacks were centred upon a small minority of the 13 million people who live in Mumbai they were targeted around the financial sector and the area where the rich and famous of India reside. In a country the size of India were different cultures and different nationalities live, terrorist attacks are not unheard of on a regular basis (indeed one UK government minister was said to have suggested terrorist attacks in India are carried out on an almost daily basis) however it is the ferocity and precision timing of his latest attacks which has stunned many.

There is no doubt that the main aim of the attacks was to cause as much damage, confusion, anger and ultimately take human life and so far all of the boxes have been ticked. This has come at a time when the Indian economy is already starting to slow down and demand for property in some areas of the country has also seen a marked reduction. While it is too early to comment upon the potential damage to the local Mumbai property market there is no doubt that in the aftermath of the attacks many of the population, property investors and businesses are very concerned.

The ripple effect

The initial impact of the attack seems to have been felt in the South Mumbai area where expensive properties had already been under pressure from low demand and excessive supply from the boom time of recent years. There is no doubt that sentiment in the area has been dented somewhat in the short term and property advisers in the region are reporting a substantial slowdown in enquiries and sales.

As is common after such events there has been something of a ripple effect across the Mumbai property market and many investors are looking to bide their time and review the situation before committing themselves to any substantial purchases. The main concern now is that as British and American citizens appear to have been targeted by the attacks, this may reduce the amount of money invested by property entrepreneurs from these countries and see demand slow yet further.

Will it happen again?

This is the question on everybody’s lips and the fact that the Indian government did not seem to be aware that such an atrocity was being planned. The sad truth is that terrorist attacks have increased around the world massively over the last decade and many countries, aside from India, are also fighting their own battles. There are some similarities with the UK and Irish situation in years gone by when a number of atrocities on the UK mainland maimed and killed many, resulting in a short-term negative impact on the UK economy and property market.

However, as with so many disputes around the world people, businesses and investors somehow learn to live with the chance that such events may be repeated although this is not to discount the impact they can have in the short to medium term. The Mumbai financial market has been hit hard by the attacks and with the general confusion and negative sentiment it has created. This will have a short to medium-term impact upon the Indian stock market and financial sector, which will then spread to the entertainment industry as some tourist decide to stay away for the time being.

The Indian economy

Overall the Indian economy has been one of the better performing economies around the world over the last few years and many believe it has the potential to become the next powerhouse and become a dominant factor on the worldwide stage. The terrorist atrocities are a short to medium-term concern but longer term the strength of the Indian economy will shine through as when international conditions improve.

Over the last few years we have seen western companies literally fighting between themselves to get access to the massive Indian market and longer term this is unlikely to be impacted by any potential terrorist threat. The economy itself will still grow this year although the international slowdown has taken a few percentage points off earlier growth forecasts in 2008.

Short-term property prices

In the short term there was already substantial pressure on the Indian property market and this will be magnified somewhat after the events of recent days. However, the terrorist atrocities are not the reason why the property market is falling back, as this is more to do with a balancing of the supply and demand figures which had moved out of sync somewhat. The wider Indian market is also under pressure and events of recent days have not assisted this area either.

Conclusion

While all of the doom and gloom merchants are suggesting this is a major issue for India, the fact remains that this is not the first terrorist atrocity in the country and will no doubt not be the last. While it is not pleasant to appreciate, the more terrorist attacks there are the less impact they have on not only the local and national economy but also the news.

Short-term there will be volatility, concern, bargain hunters and many more different aspects coming into play but it is vital not to lose sight of the fact that the property market and economy were already slowing prior to these attacks.

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