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Slowdown woes linger as demand dries up

Price correction on the anvil

The ongoing liquidity crisis in the non-banking financial company (NBFC) segment and jitters from implementation of the Real Estate (Regulation and Development) Act, 2016, have taken a toll on smaller residential developers. Collections have diminished on-year due to low incremental sales and construction slowdown because of lack of funds.


The ticket size of residential projects has been shrinking as developers have been launching units at 7-15% reduction in prices with lower average area per house, led by both market needs and the government’s impetus to affordable housing. End-users have been gravitating towards wellestablished players with a track record of completing and delivering projects on time. For smaller players though, improvement hinges on resolution of the recent NBFC liquidity issues. While large established players with relatively healthy balance sheets and a sizeable operational commercial portfolio to lean on are seeing double-digit growth in collections and sales, smaller ones have been left smarting by the twin blows.


The strong performance of the commercial real estate segment downplays the stress seen in the real estate sector. Unlike the tepid residential demand, the commercial portfolio is seeing steady lease rentals and healthy demand. Indeed, even as investor interest in the residential segment has been fading due to limited property price appreciation and inability to monetise the assets, commercial real estate is becoming a hub for new investments. This has helped cushion the blow for developers who need to refinance their debt and take on more debt for construction. Larger developers with a portfolio of commercial assets have been able to manage their liquidity better and are expected to continue to do so in a market where raising capital is becoming challenging.


Real estate demand has bottomed out,but significant demand unlikely


Our assessment of the real estate scenario in four key cities of India (Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Bengaluru and Pune) indicates that demand for new homes has bottomed out and is likely to stabilise. Over the last 6-7 years, demand has declined at a compound annual growth rate (CAGR) of 7%, both on account of city-level as well as sector-level factors. However, affordability has improved because of reduced capital values and more launches in lower ticket sizes. Over the next 3 years, demand is set to grow at a slow pace of 3%. Concerns related to income growth, preference for rental options and low confidence in under-construction projects is likely to keep demand range-bound. Bengaluru is likelyto fare relatively better than the rest of the cities. Results of some of the listed developers in the city indicate a favourable trend in area sold in fiscal 2019 compared with the previous years.


Base price correction looms, can drawin buyers


Price correction will drive individual participation gradually. In this context, we see that developers are pushing for volume sales, but prices have remained under pressure. The base price is expected to correct by 7-15% across MMR, NCR, Bengaluru and Pune, as shown in the following chart.

In addition to the correction in base price, developers are offering discounts such as inclusion of stamp duty registration, waiver of Goods and Services Tax. Freebies and add-ons are also being offered, leading to overall savings of 10-30% for end-users. The price correction, coupled with focus on lower ticket sizes, will improve affordability and give impetus to demand.


Ticket sizes have reduced in the last three years


Over the last 2-3 years, the overall area of new houses launched has been reducing to make houses affordable, given the government’s thrust on affordable housing. In the case of MMR, only 20% of new launches in the last 3 years were at a ticket size of more than Rs 1 crore, while houses launched before 2017 show 40% units priced at more than Rs 1 crore. All the four cities assessed have a similar trend. In MMR, there is a preference for ticket size of less than Rs 1 crore, while in the case of the rest of the cities, there is a preference for ticket size of less than Rs 75 lakh.