Need for safer and bigger homes to drive demand for residential real estate
While real estate and construction remained the hardest hit sectors in India in S1FY21, there was some dynamism in S2FY21, with economic activity picking up. Measures such as a reduction in stamp duty in Maharashtra, lower interest rates, pent-up demand and a halt to launches have brought some relief to the real estate sector. However, the green shoots that had started to become visible were short-lived as the second wave of the pandemic hit the country out of the blue and much harder, according to a research report from Brickwork Ratings.
Due to the accelerated vaccination program adopted by the government, it is now easing and hopefully the problems inflicted by the pandemic are expected to abate soon. While the first quarter of FY22 is expected to be near zero for most real estate players, the pace of sales is expected to pick up in the remaining portion of FY22, with launches by various high-profile players. . Increased discounts, freebies and attractive / flexible payment terms, in addition to moderate interest rates and regulatory measures, are expected to boost sales for real estate players, albeit only from S2FY22. Affordable housing space is expected to play a key role here.
Residential real estate has been facing challenges for some time now and is expected to experience some momentum in the future. With the spread of work from home and online education culture, there is an increased need for larger housing, especially for families with working couples. Sales of residential projects, which picked up towards the end of Q2FY21, only to slow down in April and May 2021, are expected to recover from the lower base recorded in S1FY21.
While negative sentiments have led to a reduction in discretionary spending, resulting in the postponement of purchasing decisions, the need for safer and larger housing may actually lead to an increase in demand for residential real estate. The sector is also expected to see an increase in home purchases by end users rather than investors. Additionally, with extended home working for corporate employees, some reverse migration to Tier 2 and Tier 3 cities is expected, which could lead to increased demand for real estate in these cities.
Despite the gradual increase in outstanding mortgage loans for banks since fiscal 2017, the year-over-year growth rate has trended downward since fiscal 20, in part due to weak buyer sentiment. due to the economic downturn, followed by the impact of the pandemic. The same trend was observed in the house price index. However, concerns about weak demand and high inventory levels were offset by renewed interest in the sector from REITs due to the low interest rate regime and expectations of a recovery. short term.
High inventory levels and sluggish demand have led to price stagnation
Source: RBI, BWR research
Commercial real estate, which has performed well over the years, has been under tremendous stress during the pandemic. It has seen a high vacancy rate and a waiver of leases, which is expected to continue through S1FY22 due to an oversupply of office space, which is further compounded by many expired leases coming up for renewals. . For the struggling commercial real estate industry, the antidote (literally) is the vaccine and the rate at which vaccine delivery is accelerated. With this, the demand for commercial spaces should hopefully pick up again, and developers should also see a demand for redesign / redesign of spaces to meet increased hygiene and safety standards in the new normal.
One aspect of this segment that could gain momentum is the concept of co-working spaces. This, while saving up-front capital expenditure and higher fixed costs, also results in longer rental terms with a pleasant lock-in period for both lessor and lessee. Another sub-segment of commercial real estate, the hotel industry, is the most affected; the recovery, although slow, will largely depend on the resumption of tourism activities in the country, in particular the start of international travel.
In terms of investment and fundraising in the real estate sector, assets in custody of foreign portfolio investors increased 103% year-on-year to reach Rs 41,476 crore in March 2021. Improving investor sentiment was reflected in declining stocks in Tier 1 cities. There has been active participation in Real Estate Investment Trust (REIT) issues, with three REITs listed in the past two years, and Rs 13,000 crore have been increased cumulatively. It has been well received by investors, and more such issues are expected in the future.
Given the decline in Covid-19 cases and the global expectation of a second wave subsiding soon, the overall macro environment is expected to remain strong, supported by stable (and improved) demand in an era of rates. lowest interest rates ever seen in India. While pent-up demand has helped keep the sector afloat amid the pandemic, the launches lined up by real estate developers would actually offer the support needed to give momentum to the recovery.