The recent headwinds in the form of higher cost of construction and interest rates may only have some short-term impact on the recovery of the real estate sector, post-covid. The mid to long-term growth prospects, however, remain intact due to strong fundamentals.
Post-covid, the realty sector has made remarkable recovery; this is evident from the surging revenue collections through property registrations in all the states. The cumulative revenue collection by way of stamp duty and registration charges from 27 states and UT of J&K topped Rs 1.71 lakh crore in FY’22, recording a 34% increase from a year ago. Maharashtra topped in revenue collections of Rs 35,593 crore, with Mumbai and Pune markets contributing 21% of the overall state revenue from real estate transactions. The improved health of the sector is also evident from the sharp rise of 20-50% in hiring by the listed realty companies in the second half of FY ‘22, with bulk of the hiring in marketing and sales.
Following severe contraction of the economy in FY ‘21 as a result of the pandemic, the Centre is boosting capital expenditure to put the economy back on track. The Centre’s capex budget has increased by Rs 3.24 trillion in two years with a FY’23 budget estimate of Rs 7.5 trillion, a 24.4% increase over the FY’22 revised budget. With this capex increase, the central government has put focus on housing and infrastructure.
In FY ‘22, the Ministry of Housing & Urban Affairs has been the biggest gainer with its capital outlay rising 152% to Rs 25,946 crore against Rs 10,304 crore in FY’21. This was meant to give a fillip to PMAY (U) and the Housing For All mission. This thinking of the central government is reflected in budgetary allocation for FY’23. The Centre allocated Rs 48,000 crore for urban and rural housing. Of this, Rs 28,000 crore was allocated for PMAY-Urban while the remaining Rs 20,000 crore was earmarked for PMAY-Rural
All this has paid dividends. A Crisil report says that housing demand rose by 33-38% in FY ‘22, surpassing pre-Covid 2019 levels, with affordable housing continuing to drive demand. This is evident from the unsold affordable housing stock falling by 21% in two years. Deepak Parekh, Chairman, HDFC, says that PMAY, under which over one crore homes have been bought and demand for larger homes in alternate locations due to remote work, are among the major driving factors. That the housing construction picked up pace is clearly reflected in the depleting unsold housing inventory, with Delhi-NCR seeing the sharpest decline in recent years - from 1.73 lakh units in 2020 March- end to nearly 1.53 lakh units by March 2022.
Besides affordable and mid-priced housing, luxury real estate also has a role in the quick turnaround of residential real estate. Post-Covid, the luxury residential market has seen a strong pick up. Luxury home sales recorded 23% increase in Q1 2022, against 16% increase seen in Q4 2021, with Mumbai market registering a two-fold yoy increase in sales during 2021. The increasing appetite of both rich end-users and investors for high-end holiday homes in exotic locations, hills and beach fronts, in cities like Goa, Shimla, Kasauli, Lonavala, Alibaug , Rishikesh etc, has been a driving factor. According to Amit Goyal, CEO, India Sotheby’s International Realty, the buoyancy of luxury homes will continue in the coming times as majority of HNIs plan to buy luxury residential real estate over the next 2 years.
Leveraging the advantage of a falling rupee, NRIs have also been active in buying/investing in luxury properties in India. Says Murali Kalyanaraman, CFO, Indiaassetz, “Historically, whenever the rupee has depreciated, NRIs have considered real estate as a good investment back home. While increase in lending rates directly affects local markets, the strengthening of dollar against the Indian rupee brings in a new set of NRIs who find investment in Indian real estate attractive.”
While the residential real estate was the first to show smart recovery, now, even commercial real estate is showing encouraging signs of recovery and growth. According to JLL, the total office leasing across seven top cities of Delhi-NCR, Mumbai, Bangalore, Chennai, Hyderabad, Pune, and Kolkata, rose nearly threefold during May 2022, to 6.1 msf. Total or gross office rose 28% from 4.8 msf in April 2022. The major share of 91% was grabbed by Delhi-NCR, Mumbai, and Bangalore in May 2022.
Flexible office space has been contributing to office space demand. According to Anarock, in FY’22, out of total net office leased space of 34.1 msf across top 7 cities, flexible space jumped to 13% or approximately 4.43 msf in 2021-22, up from 5% a year ago. Things are also looking up on the malls front, with India’s retail mall space estimation of 95 msf by 2021. According to CBRE, leasing across high streets and malls is expected to surpass pre-Covid 19 levels, with tier 2-3 cities as the major growth drivers.
The rise of alternate asset classes is also significantly contributing to real estate growth. The flexible workspace is one such class that has seen exponential growth. As per a JLL report, flexible space is expected to double its footprint to 75 msf by 2025 and top 100 msf by 2030. The warehousing market is also set for a robust growth, driven by rapid expansion of e-commerce, manufacturing, and pharmaceuticals. According to a Colliers report, gross leasing of warehousing space in 5 major cities was up 11% in January-March 2022 to 6.2 msf. Savills says that leasing of industrial and warehousing space across 8 major cities rose by 35% during 2021, with fresh supply registering 64% increase. Leasing in warehousing is set to breach pre-Covid levels in 2022. As per Knight Frank, annual warehousing transactions in the primary markets will grow at a CAGR of 19% to 76.2 msf by FY ‘26, up from 31.7 msf in FY’21.
Another alternate asset class of data centres is also showing a lot of promise. According to JLL, the data centre industry is set to cross 1.3 GW capacity by 2024, creating 9.7 msf of real estate space. There will be additional capacity additions of 804 MW during 2022-24 with 34% CAGR, with Mumbai and Chennai accounting for 68% of total capacity in 2024.
In view of the evolving Indian healthcare ecosystem, health real estate is also set to be a major growth driver. According to JLL, the demand for additional healthcare space will touch 1.3 billion sq.ft by 2030.
Heightened economic activity, an improving job market, business normalisation amidst the receding pandemic, increased government allocation for housing and infrastructure, rise in bank credit, and growing concept of home ownership are factors driving the real estate sector. According to industry statistics, the unemployment rate in urban India fell to a 9 quarter low of 8.2% in the January-March 2022 period. More than 1.26 million fresh jobs were available in May 2022, as per online job platform QJobs. This significantly improved business sentiment.
A FICCI survey reveals that business confidence index rose to 67.6 from 63.9, despite rising raw material prices and geopolitical disturbances. The substantial rise in bank credit saw a 3-year high at 13%. The personal loan segment, including housing loan, rose by 3.4 lakh crore and bank credit to NBFCs rose 10% in FY’22. Deepak Parekh is of the opinion that on the strength of rising income levels, affordability and fiscal incentives, home loans are set to double to USD 600 billion in five years. The growing concept of home ownership due to Covid-related health safety concerns, has proved to be a major factor in boosting residential realty. A survey by NoBrokers.Com revealed that millennials comprised the most active age group (30-40 years) for home buying. According to Deepak Parekh, a combination of purchases by first-time home buyers, preference for larger spaces, and a growing desire to acquire a second home in another location, have been leading the housing demand.
Amidst this positive picture, there are a number of challenges confronting real estate. After 90 bps rise in repo rates, interest rates are set to rise further by about 100 bps in the current financial year; this will adversely impact the performance of the property market. Coupled with the economic uncertainty and a fluid job market, it will dent home affordability.
Due to rising interest rates the cost of business will go up, which will put further pressure on debt-ridden developers (particularly affordable housing developers), whose margins have already shrunk due to the spurt in raw material prices. This may well cast a shadow over supply. Says Pradeep Aggarwal, Founder & Chairman Signature Global Group and Chairman, Assocham National Council on Real Estate & Housing, “The rise in interest costs will further make capital expensive for real estate developers. The funding to developers, particularly affordable housing developers, should be made easy and provided at reasonable rates. The introduction of a single window clearance system is of the utmost need for checking time and cost escalation. Single window mechanism together with strengthening of RERA will boost the confidence of homebuyers, much to the benefit of real estate growth.”
Notwithstanding these challenges, real estate has promising prospects. The stock brokerages firmly believe that rising mortgage rates will not have major impact on demand for residential realty, and mitigating factors like rising disposable income due to salary increase and low base of housing market may well prevent any slowdown. As per a Crisil report, despite increase in interest rates and property prices, housing demand in top six cities is expected to stay strong. “We expect it to grow by 5-10% with prices registering 6-10% in FY’23, marked by favourable demand-supply dynamics,” says Aniket Basu, Director, CRISIL Ratings.
The growing focus of banks on retail lending will enhance lending to commercial real estate. The last mile funding by central government’s SWAMIH Fund, private stress funding players, and NBFCs will help boost the housing market. The government’s supportive policies will continue to push housing. Its move to cut duty on building materials and fuel has already resulted in cooling down raw material (particularly steel) prices.
The RBI’s recent policy decision to allow rural cooperative banks to lend to commercial real estate and housing (affordable housing), will provide momentum to real estate recovery and growth. Says Annuj Goel, MD, Goel Ganga Developments, “The Indian real estate is set to make a great bounce back in FY’23, backed by the solid structural foundation, gain in demand, still lower interest rates, favourable economic outlook, and pick up in investment.”
A good sign is that amidst property appreciation, investors are back in the real estate market. Post the fall, realty stocks, with attractive entry points and holding promising prospects for appreciation, have caught the fancy of investors. FDI inflows continue to be strong; Indian real estate market saw capital inflows of USD 1.4 billion in Q1 2022, up by 24%, with foreign institutional investors dominating the investments. The last word comes from real estate guru Deepak Parekh, “Housing demand is structural in nature and is unlikely to dissipate soon. Rather, it is here to stay.”