"It's a buyer's market!"
Covid-19 played secret Santa for the real estate sector, as more and more people opted for larger houses and market players consolidated, mitigating the uncertainty and delivery delays that had kept buyers away. Mumbai, India's largest residential market, clocked the highest monthly housing sales in a decade in October 2021, according to real estate consultancy Knight Frank India. Hyderabad, Bengaluru and Pune, too, joined the festive cheer. "Covid impressed the need for a home, a better and bigger space, and more amenities, among others," says Niranjan Hiranandani, managing director, Hiranandani Group.
Onwards And Upwards
So, what will prices be like in 2022? Knight Frank India expects a 5% hike. "In the earlier phase, say 2011-12, the pricing power was with developers. This is a complete buyer's market. About 80% of the transactions taking place are being driven by end users. So, the ability to pass on a price hike for developers is limited," says Prashant Thakur, senior director and head of research, Anarock Property Consultants.
It's taken years for the beleaguered industry to bring back buyers. Besides Covid, low interest rates, falling prices, stamp duty cuts, and a flurry of discounts and schemes by companies have aided recovery. While the second wave did slow down the momentum, residential sales grew 92% year-on-year to 64,010 units during Q3 2021, according to Knight Frank India, exceeding the pre-pandemic 2019 average quarterly sales by 4%.
However, with labour costs and prices of raw materials such as steel, cement, aluminum and copper rising sharply, the discount party seems to be over, at least for the time being. "There is immense pressure on margins, and another wave may disrupt supply chains, resulting in project cost overruns," says Ashok Tyagi, whole time director and CEO, DLF. Godrej Properties is planning to hike prices across the portfolio and has already undertaken low- to mid-single digit hikes across markets. "We want to balance margin expansion with strong sales volumes in this market," Pirojsha Godrej, managing director, Godrej Properties, recently told investors during a call. The pricing trajectory of the residential market was "fairly upwards", and is likely to see "a more meaningful price rise," he added.
A modest hike is unlikely to drive away buyers as the affordability quotient remains strong, feel analysts. "If you look at inflation-adjusted prices, we are somewhere in the 2005-2007 era. The affordability is at a 25-year best," says Sharad Mittal, CEO, Motilal Oswal Real Estate.
Another measure of affordability, says Hiranandani, is that "the average home price, which used to be equivalent to one's five-year income while availing loans, is now down to three-and-a-half years. That means incomes have gone up, but home prices have not increased proportionately."
That's partly to do with the sector's turbulent ride over the past six years. A host of policy and regulatory decisions have impacted sales and sentiment. Beginning with demonetisation, GST, the Real Estate Regulation and Development Act [RERA], and the collapse of IL&FS, back-to-back events halted new launches as inventories piled up. Covid-19 dealt a further blow. The recovery we are seeing now, says Thakur, is from the low level of 2020, which was a "washout calendar year". Even now it's gradual, and we will reach the pre-pandemic levels only in 2022-23.
In such a scenario, low interest rates did accelerate sales. Home loan rates in some cases dropped even to 6.5%. In between, banks, offering upgrades and graduated EMIs, and government schemes, also helped in easier and faster credit access for buyers.
"The growth in GDP will mean the demand for real estate will also grow, irrespective of what Covid may throw at us," says Hiranandani.
"This is a K-shaped recovery. The weaker players have either consolidated with grade A developers or they are out of the market. While the former is finding it difficult to raise funds, the latter has been able to refinance costlier loans and bring down costs. So they are in a better situation to launch new projects," says Anarock's Thakur. An indication of the revival is the dip in unsold inventories. According to Knight Frank, after peaking in 2014, unsold inventory is now at its lowest.
Buyers are opting for developers they can trust. According to Anarock, the share of overall housing sales of the top eight listed players rose to 22% in FY21, from just 6% in FY17. While Mumbai, Delhi NCR and Bengaluru account for nearly 70% of unsold inventory pan-India, Shishir Baijal, CMD, Knight Frank India makes a distinction. "The overall inventory levels may be high, but unsold inventory of grade A developers is moving down rapidly," he says. According to analysts, that's the reason this recovery is more resilient. The financial strength and cash flows are coming back as well. Last year, Lodha Developers and Sriram Properties came out with IPOs. More are likely this year.
This has unlocked the launch pipeline. "The top seven cities saw a sequential growth of 21% in new launches, with 32,863 units during Q3 2021," according to real estate consultant JLL. Hyderabad led the launches, with a 31% share in 2021, followed by Mumbai [18%] and Pune [17%].
The preference is clearly for bigger homes. With schools, colleges and offices converging into a single space, the onus is on amenities being offered by developers. Buyers are now eyeing gated communities, second homes and vacation spaces, in the high-ticket segment. The hybrid working model has been driving interest in places such as Alibaug and Dehradun.
It's the first-time buyers in the mid-income segment who are leading the recovery. "Most of the launches are happening in the peripheries, where developers are able to offer amenities in the ₹80 lakh-1 crore range," says Thakur. "That's the sweet spot for working class people in an IT/ITeS-driven economy." According to Anarock, peripheral suburbs dominated launches across the Mumbai Metropolitan Region in Q3, comprising nearly 50% of new launches.
Closer To Hometowns
For both developers and buyers, interest remains in the top seven cities, but the hybrid work model is bringing Tier-II and III cities back into the conversation as well. "A lot of flexi spaces have come up in cities such as Jaipur, Udaipur, Coimbatore, Kochi etc. The residential development is some years away, but Tier-II cities are beginning to participate," says Thakur. Places such as Indore and Lucknow have started to see a "lot of action."
Not everybody is convinced about the longevity of the hybrid model though. Developers will focus on the top tier cities, especially IT cities, where firms are hiring more people and purchasing power is going up.
Baijal feels these towns will need to cater to "aspirational requirements such as education, medical, retail, infrastructure and bandwidth" before gaining traction. How workplaces shape up remains to be seen. The housing segment will, however, continue to expand, tracking the growth in the economy. "The only threat is if the affordability quotient comes under pressure, because the end user is price sensitive. Otherwise, we are now at the cusp of a recovery that will last eight-nine years," says Anarock's Thakur.