Showing signs of positive growth, the real estate industry in India is reviewed by Shishir Baijal, Chairman and Managing Director, Knight Frank India, to give us a clear picture of the evolving market scenario.
The Indian residential market volumes have been spiralling down and breaching new lows in terms of supply and sales for practically every successive year in this decade. Investor frenzy in the early part of this decade inspired a prolonged focus of developers in launching lifestyle projects targeted at the premium segment at progressively higher prices. These prices eventually reached unsustainable levels causing end-user demand to crack and price growth to taper down and head into negative territory as end-users and investors alike stayed away from the market over the past three years.
Developers, in cognizance of this weakening demand scenario and mounting unsold inventories, have been concentrating on freeing up capital locked in inventory, at increasingly lower prices and holding off new launches to alleviate mounting financial stress. There has also been a more concerted effort by this community to decrease ticket sizes by constricting unit sizes and reducing prices in response to the market’s demands.
Active Government Initiatives: A Boon
This redirected focus of developers on increasingly launching and re-pricing projects at lower ticket-sizes that cater to the needs of the bulk of the homebuyers, has been paying dividends. The government has aggressively pushed a culture of transparency through measures such as Demonetization, Goods and Services Tax (GST) and the Real Estate (Regulation and Development)Act, 2016 (RERA) that have helped shore up home-buyers confidence. The government’s ‘Housing for All’ scheme by 2022 and the granting of infrastructure status to the affordable housing sector have also been aimed at boosting housing supply for the low and mid-income segments and improving the affordability of the home-buyer.
While these measures have helped home-buyer sentiment, they have irrevocably changed the business of real estate for the developer. The developers’ community is coming to terms with these unprecedented events and just beginning to stabilize and find its footing.
Modest Growth: Promising Future
This period of stabilization, right-sizing, and right-pricing of new residential product and improving homebuyer sentiment due to increased transparency have culminated in a 45% YoY growth in units launched during H1 2018 and a more modest 3% YoY growth during the same period for sales. The YoY growth in supply is especially exceptional considering that the preceding 3 periods have averaged an equally steep 43% YoY drop in supply volumes due to the reasons detailed above.
Both sales and launches have grown over the past 18 months and are at their highest level since the demonetization period at approximately 124,000 and 92,000 units respectively.
Growing at 128% YoY, the Mumbai residential market accounted for a massive 40% of the total units launched in the 8 cities under coverage compared to 25% in the previous period. This surge in launches is primarily due to the temporary lifting of the ban on new constructions since March 2018 in the Mumbai municipal area. Notably, Pune and Hyderabad also saw the number of units launched grow by 78% and 44% respectively, a growing number that looks inordinately large due to the low base of H1 2017.
While the Mumbai residential market also experienced the largest sales volume among all the cities, the most YoY growth was experienced by Bengaluru at 22%. The home-buyer in this city has been especially receptive to the relaxations in the qualification criteria for projects under the PMAY, such as interest subsidies and an increase of the extent of carpet area to 160 square metres for MIG – I and 200square metres for MIG – II.
The current QTS level stands marginally lower at 11.3 quarters at the end of H1 2018, same as the previous year; however, one must also consider the entire time taken by a developer from launch to the complete sale of a project that is considered the life cycle of a project from the developer’s perspective. The project life cycle for the 8 cities under review has increased from 24.4 to 27.4 quarters which shows that in H1 2018, it takes more time for a developer to exit a project compared to a year ago. All cities show a worsening trend based on this parameter, with the exception of Hyderabad and Chennai where the market downturn seems to be easing off.
Weighted average prices have fallen, an average of 3% across cities with Mumbai seeing the most declines at 9% YoY. Hyderabad saw prices move up 8% due to record sales during this period, most of which took place in the higher priced, ready to move in the stock. This effectively also caused unsold inventory levels in Hyderabad to fall 44% YoY, the highest among all cities under coverage.
Price-drop for a Healthy Market
During the last four years, the growth in residential prices in most of the top eight cities of India has been below retail inflation growth and the gap has progressively increased since H1 2016, with exception of Hyderabad. The long-awaited drop in prices is a healthy step toward market recovery as this along with other measures such as reduction in unit sizes across cities will boost home-buyer affordability and eventually get buyers back to the market. The pace at which developers continue to align themselves to the new regulatory norms and launch new products in the right ticket sizes that appeal to the home buyer’s interests will determine the trajectory of the market going forward.
Steady Demand for Office Space Development
Supply of quality office space has been the bane of the Indian office space market in recent years as occupiers have been hard pressed to find viable options across markets. A steady demand scenario in the face of consistently low supply volumes has pushed down vacancy levels from 19.4% in H1 2013 to 12.1% in H1 2018.
Consistently falling since H1 2013, the vacancy level is close to its decadal low. The lack of fresh office space is most visible in the IT/ITeS sector dominated markets of Bengaluru, Pune, and Hyderabad that currently have single digit vacancy levels at 3.5%, 5.7% and 6.8% respectively while Chennai stands precariously poised at 11%.
Office space development has traditionally lost out to residential development due to the much longer gestation period that an office property requires to stabilize and achieve its full market valuation. Comparatively, a residential developer can look forward to exit from his investment over a much shorter time horizon. Even private equity investors have been more inclined to acquire stabilized assets as an overwhelming 89% of their investments have been routed toward the acquisition of already matured assets.
The Indian office space market saw 2.0 mnsq m (21.7 mnsqft) of transactions registering a healthy 13% growth YoYhile 1.7 mnsq m (18.2) mnsqft) of office space came online during the same period. The highest spurt in transactions was experienced by the Pune office market that grew at 118% YoY, primarily due to a 0.1 mnsq m (1.1 mnsqft) lease inked by a BFSI sector major during H1 2018.
Healthy Growth In Rentals
Strong transactions growth also spurred rentals during the period that grew at a robust 5% YoY during H1 2018. Led by the Bengaluru office market, all markets with the exception of Mumbai experienced healthy growth in rentals during the period. With the lowest vacancy levels among all markets, the Bengaluru office market saw rentals vault by a remarkable 17% thanks largely to corporates taking up space in the higher priced CBD and Off-CBD business districts. Companies have also been entering en masse into pre-commitments to lock in prime office space in this extremely supply constrained market.
The IT/ITeS sector share in transactions has increasingly been showing signs of weakening in recent periods due to macro headwinds in the form of a slowdown in spending as well as an inclination to insource by the USA and several European countries. Losing ground since H2 2016, it accounted for 28% of the transacted volume during H1 2018 compared to 33% in the previous period.
The share of the Other Services sector has been consistently growing and has eclipsed that of the IT/ITeS sector during H1 2018 by taking up 40% of the in the recently concluded period on the back of increased take-up by e-commerce and co-working companies. The co-working sector took up 0.3 mnsq m (2.8 mnsqft), which translates to a significant 32% of the space transacted by the other services sector or 13% of the total space transacted during H1 2018.