Real estate sector - recovery not yet on cards-min
While RBI data suggest that the annual size for home loans greater that Rs 50 lakhs is only 83,000 accounts, the unsold inventory of houses priced at over Rs 60 lakhs in just nine leading cities in the country is more than 3,10,000. However, actual sales in these markets are much more than the premium home loan accounts which indicate existence of significant investor demand
According to some experts, for Indian real estate sector, especially residential segment, recovery may not happen in the near future and the sector may have to undergo still more pain. There is no doubt, Real Estate (Regulatory and Development) Act or RERA has shaken up the sector though its impact is not yet visible for plain eyes. Experts believe that at least 60% of Grade B developers will go out of business and that may happen in next two years. It is believed that many B Grade developers have already put up their projects for sale and real estate residential sector is expected to see consolidation in the coming days.
During FY13-FY18, property prices grew at a lower rate than inflation (while residential property prices grew during FY13-FY18 at a CAGR of 4% versus average inflation of 6%) and that too in an environment where mortgage rates fell by 250bps, indicating availability of funds at affordable rates is not the sole determinant of real estate demand. High prevailing prices of residential units is not the only factor for poor demand as some affordably priced markets like Kolkata, Hyderabad and Noida/Greater Noida have also shrunk in the last 5 years. An analysis of physical real estate market in metros reveal weak sales, high inventory and poor pricing trend.
As per the data available, residential absorption dipped in all key metros in FY18. Even more worrisome is the fact that fourth quarter sales data for FY 2018 of major real estate companies does not hold much promise as sales fell in most markets on year on year basis with the only exception being Gurgaon where there was some recovery from a very low base. Inventory, that is unsold stocks, at around 39-79 months in metros is all-time high which is another indication of distress in the market. Usually, around 12-24 months inventory levels are considered ideal. An equity research report published at the end of calendar year 2017 had brought out an interesting point. While RBI data suggest that the annual size for home loans greater that Rs 50 lakhs is only 83,000 accounts, the unsold inventory of houses priced at over Rs 60 lakhs in just nine leading cities in the country is more than 3,10,000. However, actual sales in these markets are much more than the premium home loan accounts which indicate existence of significant investor demand. It is estimated that at least one third of the sales is accounted for by the investors in these markets. Thus, it is not just reduction of mortgage rates but also potential returns from investments also play important role in reviving the market.
It is true that during last five years houses have become more affordable than they were five years ago. But this affordability has got to do more with rising income levels rather than falling real estate prices.
The four metro cities in India, viz., Delhi, Mumbai Kolkatta and Chennai, account for less than 10% of country’s concretised housing market, but are considered to be matured markets as supply demand dynamics and investors demand are the key drivers of these markets. However, high inventory of unsold projects and greater emphasis on completion of stalled projects post RERA are likely to have an adverse impact on announcement of new projects in these markets. Usually these markets set the trend for other markets to follow.
Impetus given by the government to affordable housing may help in reviving the market but not immediately. Leading real estate players, however, view affordable housing with skepticism as their previous venture into this segment had met with limited success due to problem of scalability. Also, moving from higher margin to lower margin business is a task easier said than done. Other problems relating to affordable housing are higher focus on working capital and its efficient management, fast execution of projects which in turn requires speedy approvals are some of the problems which act as deterrent for established developers to venture into this segment.
However, leading developers find office and retail segment more attractive even though they are more capital intensive. This segment is less fragmented and potential for scalability make this segment more attractive for developers. Interestingly, office market cycle is improving but continuation of this positive trend largely depends upon the fortunes of IT and ITES sector. While in Bengaluru, vacancies in this segment are fast declining, Mumbai, Chennai and Gurgaon office markets continue to remain sluggish.
One of the main structural changes introduced in the real estate sector is the enactment of RERA which has established a regulatory oversight mechanism. Back ended cash flow for real estate companies, slowdown in new launches and lower investor demand are some of the immediate consequences of RERA in the sector. Apart from RERA, demonetisation and subsequent calm down on cash transaction, crackdown on benami transactions and changes in taxation policies especially relating to rented residential properties have impacted the real estate business. Most of these measures will have short term pain with long term benefits.
However, frustration has started creeping in as the demand pick up is getting delayed due to series of government actions like demonetisation, GST and RERA laws. Experts believe that the sector is becoming more organised with many small time players shutting down their business. Also, many established builders are entering into development management agreements with stressed builders, whereby they lend them their own brand to improve sales potential and help them market the projects through their own sales and marketing personnel. This type arrangement is expected to pick up in the coming days.