CRISIL Research believes demand for residential property is unlikely to revive in the next 12-18 months as the fundamental problem of lack of end-user buyers is unlikely to change any sooner.
To be sure, absorption of new homes has been on a slide for over six years now. Our analysis shows home sales in the top 10 cities – Ahmedabad, Bengaluru, Chandigarh, Chennai, Hyderabad, Kochi, Kolkata, MMR, NCR and Pune – have declined at a compound annual growth rate of 8% since 2011. The trend appears set to last well into fiscal 2019 or beyond, portending more pain for developers.
There are six reasons for this:
First, 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.
Second, 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.
Third, 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.
Fourth, 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.
Fifth, 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.
Sixth, 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.
Says Prasad Koparkar, Senior Director, CRISIL Research: “The next few quarters will see more launches in the affordable housing category, or projects with smaller configurations, leading to a reduction in the overall ticket size. That, along with falling interest rates and supportive credit-linked subsidy framework, will benefit end-users because affordability improves.”
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. In addition, only a handful of state RERA websites – in Gujarat, Karnataka, Maharashtra, Punjab, Tamil Nadu and Uttar Pradesh – are operational and have started publishing project information online. Also, one sees a dilution in the definition of ‘ongoing project’ in the notifications of some of the states. These need immediate and effective monitoring by the central authority.
We see prices hovering at current levels on account of weak demand and moderation in new supplies.
Says Binaifer Jehani, Director, CRISIL Research, “Among cities, demand in the National Capital Region has wilted the most over the past 4-5 years and is unlikely to recover in the medium term. The sheer number of disputes between buyers and developers there is a clear indication of lost confidence of not just the end-users but also of the investor community.”
On the other hand, close monitoring and active management by the Mumbai Metropolitan Region (MMR) has spawned tremendous response in both registration of projects (an increasing number of which are for smaller-sized residences) and disclosures on the MahaRERA website.
Based on these developments, CRISIL Research believes MMR is likely to recover first from the current downturn.