Demand for residential property is unlikely to revive till the second half of the calendar year 2018, as the fundamental problem of lack of end-user buyers is unlikely to change any sooner.
Absorption of new homes has been on a slide for over six years now. Home sales in the top 10 cities — Ahmedabad, Bengaluru, Chandigarh, Chennai, Hyderabad, Kochi, Kolkata, Mumbai Metropolitan Region (MMR), National Capital Region (NCR) and Pune — have declined at a compound annual growth rate (CAGR) of seven-eight per cent since 2011.
There are six reasons for this:
High property prices have turned end-users into fence-sitters in most micro markets. Though capital values have been under pressure over the past few quarters, a significant chunk of supply in many micro markets remain unaffordable.
Concerns over job losses and lack of employment opportunities — especially low-skilled ones such as in IT/ITeS — on account of increasing automation, among other things, are increasing. This curtails income visibility required for a housing loan, which is typically for a long tenure.
Rentals are being preferred to buying a property as high prices mean hefty down-payments and equated monthly instalments. Many nuclear families are opting for rental accommodation in suburban locations than purchasing a house in a peripheral micro market.
There are risks associated with delivery of under-construction projects, especially delays in getting possession from the developers, which deter buyers. Resurgence in buyers’ confidence will happen only when they see the Real Estate (Regulation and Development) Act (RERA) working in their favour.
Participation of the investor community has reduced significantly on account of falling returns on the asset class, owing to stagnant capital values, limited income tax benefits on let-out properties (announced in Union Budget 2017-18), and changes in the regulatory framework to curtail pre-launch transactions.
Until recently, developers were focussed on mid-category/ luxury/ premium housing projects. This has led to huge unsold inventory of units — especially in the mid-segment — which are beyond the reach of the average buyer. The affordable housing segment has pent-up demand, and also favourable policy interventions, but developers have only just shifted focus to it.
We see prices hovering at the current levels on account of weak demand and moderation in new supplies.
In the medium term, effective implementation of RERA can help infuse transparency and improve buyer confidence. While most states and Union territories have notified their respective Acts, many are yet to form permanent RERA authorities.
MMR will be the first to recover
Unlike other states where details of a few projects are available online, Maharashtra has seen tremendous response in both registration of projects as well as disclosure on the MahaRERA website, thanks to close monitoring and active management by the authority. MMR has also started witnessing supply of projects with smaller units — mostly in peripheral micro markets. CRISIL Research, based on two key leading indicators — effective execution of RERA and developers’ action on housing projects with smaller configurations — estimates that MMR has fared better in terms of both the aspects. Therefore, once the sector revives, based on end-users’ confidence, MMR is likely to recover first.
Revival in NCR to be the toughest
While major cities continue to be plagued by moderate unsold inventory, those in the northern region such as NCR continue to witness huge unsold inventory. NCR and MMR are two huge cities in terms of both demand as well as supply of real estate projects, among the top 10 cities. However, demand has been dwindling in the NCR over the past four to five years, and the trend is unlikely to recover in the medium term.
The large number of disputes between buyers and developers in the city is a clear indicator of lost confidence of not just end users but also of the investor community in the market. Despite a favourable policy framework and scheme amendments, the real estate sector in the NCR continues to witness tough times. On account of almost nil demand in the past few months, several developers have been facing a severe cash crunch. Many instances of defaults by developers were witnessed on interest payment, repayment of term loan and / or debentures. Since August 2017, several lenders (as consortium in few cases) have filed insolvency cases before the National Company Law Tribunal (NCLT) against such developers. This has led to a massive outrage among home buyers whose exposure to the sector is manifold compared with the outstanding dues of financial lenders. Home buyers fear that in such proceedings, financial creditors will get higher preference despite the buyers’ significantly higher exposure to these projects. The National Company Law Tribunal has already appointed Insolvency Resolution Professional (IRP) in a few cases and resolution plans are under way. The final outcome/ resolution typically needs 180-270 days of decision making and involves the view of all stakeholders.
For the long term, the next few quarters will likely witness launches in the affordable housing category, i.e., projects with smaller configuration, leading to a reduction in the overall ticket size. With the government’s emphasis on housing for all, budgetary announcement of benefits to units with smaller area, and Credit Linked Subsidy Scheme benefit to end-users, the segment is expected to grow rapidly over the medium term.