Market Report: India Residential Sector Gears Up for an Overhaul

By Anshuman Magazine, Chairman & Managing Director, CB Richard Ellis, South AsiaThe residential sector in India has undergone a far-reaching metamorphosis in the last decade. After years of unplanned and haphazard development, the sector is now marked by enhanced product offering, heightened investment including foreign capital, and augmentation of the national footprint of some prominent…

By Anshuman Magazine, Chairman & Managing Director, CB Richard Ellis, South AsiaThe residential sector in India has undergone a far-reaching metamorphosis in the last decade. After years of unplanned and haphazard development, the sector is now marked by enhanced product offering, heightened investment including foreign capital, and augmentation of the national footprint of some prominent Indian developers. Modern apartments and villa and township projects have come up across the country and new city master plans have been drawn to include a number of suburban and peripheral locations within the city’s folds.The Indian economy has been growing at an average rate of 8.8% in the last four fiscal years, with the 2006-07 growth rate clocking an impressive 9.6%. This stellar growth, augmented by the unmatched fundamentals that the country enjoys, has given strong impetus to the real estate sector in India. The residential segment leads the growth trajectory—nearly 75-80% of the total real estate space development across India is in the residential segment. Rapid urbanization, increase in number of households, rising income levels, and easy availability of housing finance are among the chief reasons cited for this trend. According to United Nations Population Fund (UNFPA), India’s urbanization rate is higher than the world average, and by 2030 more than 40% of the country’s population will be living in urban areas. This, together with the fact that the average household size in India is fast decreasing, has fostered residential demand in recent times.Also, salaries in India have been rising at the rate of 10-15% per year and the per capita disposable income that has increased manifold in the past decade is expected to further grow by 8-13% in the next five years. Thus, improved affordability and the increased penetration of housing mortgage finance have led to the unprecedented housing acquisition drive both by end-users and investors. Over the last few years, unabated demand and supply-demand gap has led to spiraling of capital values across locations and cities.Dealing with a slowdownHowever, after a dream run of close to 36 months, the residential sector has been exhibiting signs of slowing down in the last few quarters. In response to the Reserve Bank of India’s measures to control credit growth and liquidity in the economy, interest rates on home loans have increased by several basis points in the last year. This came at a time when the rising residential values and compounding inflation had started to negatively impact the affordability of many end-users. Shrinkage of demand and retreating of end-users and investors from the market had closed the gap between demand and supply, resulting in correction in values. On the other hand, developers are facing a cash crunch due to diminishing sales, expensive credit and drying up of private equity funding as a result of the current global investment conditions. New project launches have been put on hold and under-construction projects are facing delays.Within such a scenario, developers and stakeholders in this sector are looking at optimizing their resources and employing befitting strategies to tide over the current times. With buyers adopting a wait-and-watch stance, developers are taking various steps to bolster sales. These range from giving early-bird discounts on bookings to freebies such as semi-furnished homes and cars. Apart from the above, in line with quickly changing external conditions, some structural changes are also underway in the residential sector, with affordable housing or mid-end becoming the new mantra. Until now, most of the developers focused on constructing high-end housing, and there has been a dearth of mid-priced, affordable units. Temporarily reduced buying power due to high inflation rates and stock market fluctuations—combined with the hike in interest rates—have impacted the demand for high-end residences. As such, venturing into affordable or mid-priced housing seems to be the appropriate recourse, as developers are realizing that the segment offers maximum opportunity and prospects on account of two key factors. First, the total estimated shortage of 26 million dwelling units, the maximum shortage is in the mid and low segment, and the demand here is relatively inflexible. Second, this segment will entail a volume game rather than value, and will serve to boost the topline. With the builder fraternity moving in to fill the existing gap in affordable housing, some constructive steps need to be (or are being) taken by the government to facilitate this movement. These would primarily include introducing progressive reforms like repealing the Urban Land Ceiling Regulation Act (ULCRA limits land holding quantum at a single entity level); and, increasing Floor Space Index (FSI restricts the built-up potential on a plot of land), micro-financing and removing restrictions on credit availability for such kinds of projects. Also, mobilizing funds from various agencies, encouraging private-public partnership, subsidization of construction inputs, and above all developing land and providing infrastructure facilities in locations feasible for affordable housing projects, will give it the required boost. A number of prominent developers are in the process of shifting focus to mid-end and affordable housing. Apart from affordable housing, integrated township developments are also increasingly gaining momentum.Price corrections are inevitableThe Indian real estate market, including the residential sector, has traditionally been an under-supplied market. On the demand side, Indian consumers are informed, discerning and demand value. Corollary to the current economic conditions, demand has been compressed but is expected to spring back with interest rates softening, price reduction and property market sentiment improving. Price corrections are inevitable, particularly in markets where a demand-supply mismatch has been built up. Under the current scenario, it is imperative that residential supply and demand are coordinated and that gaps, wherever existing, are filled. In the long term, current churn and shakeout in the Indian real estate sector is expected to lead to market consolidation, making it more attractive for foreign investors and PE funds, as the valuations will be more realistic.With India’s strong economic and demographic fundamentals,  real estate will remain a long-term attractive proposition. Hopefully, the next cycle we witness after the current slow down will be the one that is more efficient and self-sustaining. Anshuman Magazine is chairman & managing director, CB Richard Ellis, South Asia