Reasons That Mark The Return Of Real Estate To Normalcy This Festive Season And What It Means To You

While there were some green shoots of recovery visible in the real estate sector at the beginning of the year, the lockdown induced by the Covid-19 pandemic played spoilsport in March and continued to do so until the government, developers and banks decided to go full steam with measures to enhance demand. Those measures seem to have paid off in the third quarter.

States such as Maharashtra decided to reduce stamp duty rates on property transactions until March 2021. Financial institutions brought down home loan interest rates to the sub-7 percent level. And builders started doling out lucrative payment plans and deals that helped boost sales.

However, it remains to be seen whether these are mere steroid shots or actual signs of recovery. A true picture is likely to emerge only after the results of at least two quarters post the lifting of the lockdown.

It should be noted that the lockdown did not stop developers from engaging with buyers, which they continued to do so through active usage of digital platforms. Increasing digitisation played a key role in aiding online home sales and transaction payments.

First-time homebuyers continued to prefer affordable ready-to-move-in houses and those in advanced stages of construction. Those wanting to upgrade preferred larger homes with dedicated work and study areas on account of the work-from-home shift.

Housing units in the sub-Rs 45 lakh price bracket, categorised as affordable housing under income tax laws in India, made the biggest contribution to sales during the quarter, contributing 45 percent to overall sales numbers.

Residential market activity was also supported by renewed interest from NRIs in the third quarter.

And the efforts did pay off with most third-quarter projections by real estate consultancies talking about a recovery in the real estate sector.

The gradual unlocking of the economy, pent-up demand, improved affordability on the back of reduced home-loan rates, as well as attractive payment schemes and discounts, led to residential real estate recording 60 percent quarter-on-quarter growth in the second quarter of financial year 2021, an analysis by ICRA has said.

Another report by PropTiger.com also said residential real estate sales rose 85 percent QoQ in Q3 2020. The growth can potentially be attributed to pent-up demand due to the prolonged lockdown across the country.

Another report by Liases Foras said that sales across Tier I cities have recovered by 60 percent in the second quarter of 2020. The maximum increase was observed in Kolkata, at 68 percent, followed by Ahmedabad with 64 percent, and MMR and Bengaluru with a 60 percent increase each.

On a year-on-year (YoY) basis, however, overall sales across tier I cities is 37 percent lower than they were last year during the same period. Sales in NCR and Bengaluru witnessed the maximum decline of 47 percent and 46 percent, respectively, on a YoY basis. They were followed by Ahmedabad (37 percent) and Kolkata (32 percent), says the report, titled Residential Real Estate Market Report – Tier 1 cities Q2 2020-21.

A report by JLL India said that housing sales were up 34 percent in July-September and unsold inventory was marginally down. It noted that Mumbai accounted for 29 percent of the total sales in the quarter, while 22 percent came from Delhi-NCR.

Data analytics firm Propstack reported that real estate sales in Mumbai grew by almost 35 percent year-on-year in October, indicating the massive pent-up demand among end-users for property and clearly indicating that the State government’s decision to reduce stamp duty is finally showing results.

Here are some answers to pertinent questions posed by homebuyers:

What are the demand drivers post the lockdown?

The growth in the real estate sector is driven by offers and flexible payment plans such as the 10:90 or the 20:90 payment schemes being doled out by some developers. Along with these offers, lower interest rates, stamp duty waivers, not to mention fence sitters and the overall pent-up demand are drawing homebuyers. It is truly a buyer/end-user market, and the coming quarters and festive season are expected to see growth in sales numbers.

Is it a real recovery? Has the market touched pre-Covid-19 levels?

While the third quarter definitely saw better performance than the second quarter, the sales numbers have still not touched pre-Covid-19 levels.

“It is a revival but recovery is yet to happen. The market has definitely bounced back from the ‘zero’ level in April but whether it is a real recovery or not, one can tell only after two quarters,” said Anckur Srivasttava of GenReal Advisers.

“At least two quarterly results will make it clear if this can be termed as a recovery or just a dead-cat bounce. The recovery trend will be established only if the momentum exists for the next six months. This is important as in Mumbai, the stamp duty window is available only until March,” he added.

Where is the demand coming from?

The demand is coming from end-users, both domestic and NRIs, especially first-time homeowners and even those wanting to upgrade to bigger homes. Reverse migration has further supported an increase in housing demand in tier II/III cities.

Almost 80 percent of the demand is from end-users for affordable housing — these are either first-time buyers or upgraders. Investors are also gradually tip-toeing into the market, especially in the plot segment.

Which segment is showing signs of revival first?

In terms of ticket size, the affordable and mid categories have remained the highest contributors to sales (Rs 50 lakh to Rs 1 crore), followed by the upper-mid segment, both before and after the onset of the pandemic, primarily on the back of low ticket sizes and a high level of government incentives, the ICRA analysis said.

Established developers with a higher proportion of well-priced inventory, catering to these sweet spots, are likely to see a quicker pace of recovery in sales going forward, it said.

The highest recovery was witnessed in the case of advanced-stage or completed inventory.

Are there any new launches this festive season?

According to Liases Foras, new launches recovered by 68 percent in September at 18,591 units compared to last quarter but the number is still 70 percent lower than during the same period last year.

The maximum revival was witnessed in Hyderabad (658 percent) followed by Kolkata (326 percent), MMR (238 percent) and Pune (164 percent).

But if one were to compare new launches with the same period last year (on a year-on-year basis), new launches decreased 70 percent.

New launches in Chennai witnessed the maximum decline of 86 percent followed by Kolkata (81 percent), Bengaluru (80 percent), Hyderabad (78 percent), Pune (76 percent), Ahmedabad (64 percent), NCR (63 percent) and MMR (58 percent), it said.

The focus of new launches this season is on the mid and affordable segment

Developers’ focus on the mid and affordable segments continued in the third quarter, with nearly 75 percent of the new launches in the sub-Rs 1 crore category. Moving ahead, the focus on these price segments is expected to continue with developers focussing to reap the benefits of strong pent-up demand.

Besides the ready-to-move-in units in the price range of Rs 50 lakh to over Rs 1 crore, the plot segment is currently selling well.

Which formats are witnessing traction?

In terms of flat formats, 1.5/2 BHKs have traditionally remained the highest contributor to supply and sales, followed by 2.5/3 BHKs. While the sales mix remains similar post-Covid, the absorption level for 5 BHK and other large formats has increased significantly in Q2 FY2021. Plots, too, where the dependence on the developer is minimal, are doing well.

This is possibly due to increasing preferences for dedicated work or study areas and second or holiday homes, due to expected changes in working and living styles going forward, ICRA has said.

Increased demand from NRIs on the back of returns to the homeland may also have supported the trend, as such buyers typically opt for larger format flats, and the current depreciation of the rupee, together with attractive deals, would have supported their purchasing power.

Demand has also increased considerably for 1BHKs, primarily supported by first-time homebuyers, thus reflecting the growing importance of owning a flat.

Where are prices headed?

Prices continue to remain stable and are not expected to go down further. In select pockets where ready inventory is available, prices have also inched up slightly.

According to Liases Foras, the weighted average price across Tier I cities remained stable in the second quarter of the financial year 2020-2021. Prices remained stagnant in Chennai, Kolkata, NCR and Pune. The price in MMR reduced marginally, by 1 percent, and increased by 2 percent each in Ahmedabad and Hyderabad.

The YoY weighted average price across Tier I cities remained the same as compared to a year ago. Chennai exhibited the maximum increase in prices, by 3 percent, followed by 2 percent in Hyderabad. Prices dipped in MMR (3 percent), Kolkata (3 percent) and Pune (-1 percent). They remained stable in Bengaluru and NCR.

According to JLL, too, residential prices in most markets have remained stagnant. Developers have been operating with low margins and the chances of a significant reduction in prices are unlikely.

However, it is important to note that developers in certain markets are providing moderate price discounts to kick-start sales, thereby facilitating cash flows to tide over the crisis in the short term.

They are also offering flexible payment schemes such as no EMIs for a year and other schemes to attract prospective homebuyers who pressed ‘pause’ in the last few months. Other schemes on offer include possession-linked payment plans, where the customer pays just 10 percent now and nothing for the next two years.

But what takes the cake are the property-swap schemes. In these Covid-19 times, a few brokerage firms and developers have launched property-swap schemes to help homebuyers and investors stuck with projects for years to exchange their residential or commercial properties with a ready-to-move-in project through contract restructuring.

Is unsold inventory declining?

Due to the strain on consumer demand as a result of the coronavirus-induced economic uncertainty, inventory overhang has increased significantly from the level seen in the same quarter last year.

National inventory overhang increased to 43 months as of September 2020, as compared to 28 months in Q3 2019. Inventory overhang is the estimated time within which developers will be able to sell their current unsold stock.

After a reduction of 12 percent year-on-year, unsold stock in the top eight residential markets was at 7,23,060 units as on September 30. Developers continue to show restraint in launching new supply because of the ongoing market conditions. Unsold stock contracted by 2 percent in the September quarter when compared to the preceding quarter, a report by Liases Foras said.

Housing markets in the West region continue to have the highest share in overall unsold inventory. Mumbai and Pune together contribute 56 percent to the national unsold stock, followed by NCR and Bengaluru, with 15 percent and 10 percent, respectively.

According to JLL, the July-September quarter witnessed sales outpacing new launches as unsold inventory across the seven markets (Mumbai, Delhi-NCR, Bengaluru, Hyderabad, Chennai, Pune, and Kolkata) decreased marginally from 459,378 to 457,427 units. Mumbai and Delhi NCR together account for more than 50 percent of unsold units, which are at various stages of construction.

Should you buy it now?

Yes. This is perhaps the best time to buy. Stamp duty rate cuts have been introduced in some states, the cost of capital is low, and developers are offering easy payment plans. “Everything seems to be ticking the boxes and it is the best time to buy. Many of these incentives may not exist in the next few months,” said Mudassir Zaidi, Executive Director – North, Knight Frank India.

Is the recovery here to stay and what are the challenges ahead?

Going forward though, the sustainability of the uptrend and its drivers remain to be seen. Housing sales may fall 35-40 per cent in the ongoing fiscal year even though demand improved during the September quarter, rating agency ICRA has warned.

Moreover, with Q2 FY2021 sales still remaining 37 percent lower than the levels recorded in Q2 FY2020, a return to pre-Covid sales levels also remains a key look-out area. ICRA continues to expect the overall financial and operational performance of real estate developers to be adversely impacted in the short term due to the escalated demand risks, lower collections, and Covid-related disruptions in project execution.

Developers with adequate balance sheet strength, available liquidity, financial flexibility, refinancing ability and a well-diversified project portfolio are expected to be better positioned during this crisis. Consequently, the trend of market consolidation is likely to accelerate, with range-bound prices and low home-loan rates expected to continue supporting sales for established players.

The significantly higher supply of under-construction units versus advanced-stage units is also expected to pose challenges for developers with a high dependence on sales from under-construction inventory, ICRA warned.

(Source: Moneycontrol)