The current state of residential real estate market is in slumber. According to a recent (November, 2015) random survey of nearly 125 real estate developers in Delhi-NCR (National Capital Region) by Assocham, the demand for buying property has decreased by over 30 per cent over the last year.
The study further adds that the NCR residential market still has an estimated 1, 70,000 units of unsold inventory which is approximately 30 per cent of the units under construction. Prices according to the report are down by around 20 per cent while new launches are almost absent.
Given the supply overhang and changing dynamics of regulations and financing options, the scenario as per a recent report released by global real estate consultants, Cushman & Wakefield, may change in the near future. They are of the view that overall urban housing demand in India is expected to grow by nearly 15 million units by the end of 2019.
Within it, the top eight cities will contribute 3.4 million units to this overall demand while within the top eight cities, Delhi NCR representing NCT, Gurgaon, Noida, Ghaziabad and Faridabad , will chip in with a quarter of the share of the top eight cities – 872,000 units in absolute terms.
Demand drivers: Within the top eight cities, as per the report, the Middle Income Group (MIG) will be the primary demand driver accounting for a 41 per cent or 1.4 million units in absolute terms by the end of 2019. Close on the heels of the MIG category will be the LIG category which will contribute 1.3 million units in the top eight cities during the same period. Overall, demand is expected to outstrip supply by roughly 2.5 times. At least a quarter of this demand will be contributed by Delhi NCR.
Supply scenario: The slump in the real estate sector still continues. There are unsold inventory in the system while developers other than offering freebies, haven’t reported to any major cut in prices in most locations. Sanjay Dutt, Managing Director, India, Cushman & Wakefield says, “While the forecasts are in favor of demand, rather than supply, in the coming years, the ground reality today is that there is a perceptible supply overhang – residential stock not translating into sales. In order to push sales, developers have offered attractive schemes which, when translated to the final price paid by the end user, translates to a discount. Despite these attractive schemes offered by the developers, the supply overhang continues to bother the sector.”
Top contributors: During 2015-19, Delhi NCR, Mumbai and Bengaluru will be the top three contributors, together accounting for 60 per cent of the total incremental demand. The top two cities with the highest gap in demand and supply are Hyderabad and Chennai with a gap of 83 per cent and 76 per cent respectively. Delhi NCR is projected to witness a relatively lower gap in the MIG segment as compared to the other cities.
As far as future scenario in the sector is concerned, Sanjay says, “While we expect the situation to remain ‘status quo’ during 2016, the impact of these developments will gradually set in towards end of 2017 or early 2018. Before we see an upward movement in prices, the sales uptick will improve.”
The contra view: According to CRISIL, the demand over the medium term will be tepid. CRISIL’s analysis of India’s top 25 realtors, comprising 95 per cent of the market capitalisation of the sector, shows that as much as Rs 30,000 crore of debt obligations will face high refinancing risk with demand in their respective markets expected to be tepid over the medium term.
CRISIL is of the view that recent regulatory measures such as relaxation in foreign direct investment (FDI), and recourse to funding through non-convertible debentures (NCDs) and private equity, are expected to provide some respite in the short term for the sector. The flipside, however, is the high returns expected by private equity investors compared with the relatively low cost of bank loans.
Assuming this to be 20 per cent per annum, the cumulative pay out by the sector over a 5-year horizon can be as high as Rs 85,000 crore. This can amplify refinancing risks by an order of magnitude unless demand picks up substantially. However, fund availability may ease to some extent. Sanjay says, “The economic recovery will further aid the private equity fund raising activity in the real estate (including residential) thus enabling availability of funds for developers.”
BW Reporters
Sunil is an experienced journalist with in-depth understanding of the financial services industry especially in areas insurance, loans, financial planning, personal taxation and also mutual funds
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