The pandemic has battered almost all the industries, residential real estate being one of them. How did the residential real estate perform in the past two quarters?
The pandemic hit when the Indian economy was already showing signs of slowing down. The banking sector struggling with huge NPAs and NBFCs grappling with severe liquidity crunch were finding it hard to lend to the real estate sector. Sluggish sales on account of pandemic induced lockdown and labour shortage on construction sites added to the woes of the sector and brought transaction activity to a halt. Developers postponed new launches in view of the unprecedent disruptions caused by the pandemic. Since the gradual relaxations in the lockdown and economic activity increasing, residential real estate has been showing slow but steady signs of improvement at a pan India level. Modest growth in enquiries has been registered during the past 2 quarters and transaction activity has resumed owing to the lower interest rates and attractive deals that developers had offered during the festive season. However, towards the end of August, the state of Maharashtra showed the path forward by decreasing the Stamp Duty rates by 3% until 31st December 2020, which will then increase by 1% until 31st March 2021 and then go back to normal levels. This resulted in a sizeable uptick in sales registrations as many developers in the state decided to pay the entire Stamp Duty themselves.
How will be demand take-off in the remaining quarter of the current financial year?
For the remainder of the current financial year, the momentum in transaction activity is likely to continue its slow but upward march. However, the demand levels will still not match up to pre-pandemic levels as the economy is still under some duress. The housing demand will remain driven largely by end users as investors are currently looking at alternative asset classes. Projects already completed or near completion will drive the bulk of the demand. Developers are likely to focus on more efficient planning keeping in mind the evolving preferences of homebuyers and will incorporate more customisable spaces in their product offerings which can be utilized as workspaces.
What is your assessment for the next financial year 2021-22 for the residential real estate sector?
Although transaction activity has been gaining slow but steady traction in the past quarter owing to pent up demand and incentives being offered by developers and the government, a strong revival will depend on overall economic recovery and job growth.Clearly, there are challenges ahead. Heading into 2021, we expect property prices to remain largely static. Transaction activity is expected to rebound in the second half of 2021 as a Covid 19 vaccine becomes available to the masses and the job market becomes more stable.Pune, Bengaluru, Hyderabad, and Chennai are expected to witness faster recovery compared to Delhi NCR region, because demand is largely driven by the IT sector employees in these cities, which has remained resilient compared to other industries and firms are ramping up hiring in these cities.
Is there a shift in buyer’s preference in terms of flat formats from 2bhk-1bhk to mid-size and affordable housing?
Developers across major metros had started adopting the strategy of compact housing to reduce ticket sizes for buyers before the pandemic induced lockdown was imposed. The pandemic underscored the importance of home ownership for safety and hygiene reasons.The residential real estate market is currently driven by end users who prefer customizable spaces which can be used as workspaces or for online education. Although, vast majority of the buyers’ are preferring mid-size apartments there are some buyers’ interested in larger residential properties even if that means relocating to suburbs or peripheral areas within the city and in some cases, even to other smaller cities so that they do not go over budget.
Post lockdown what is the role technology is playing in marketing and construction of residential real estate?
The pandemic induced lockdown and social distancing norms have accelerated some of the underlying trends in the sector like adoption of PropTechin residential real estate. Some of the technologies and the role that they play are virtual property tours have become much more widespread than before. They are not just being deployed for luxury projects, but also for mid-range projects; listing platforms are increasingly employing and offering data analytics to users to help them understand market trends and offerings. Further, they are also using predictive analytics based on potential home buyer preferences. Although currently in early stage of adoption, Big Data analytics and Machine Learning have immense potential to significantly ease the process of property selection by predicting what a homebuyer would want, even if they have not explicitly stated that.
To ensure the timely completion of projects and reduce cost overruns, numerous construction companies in India have prioritised the digital transformation journey by using BIM to store and process vital information about scheduling, costs, operations and maintenance. Increasing usage of Internet of Things (IoT) devices is helping to run and maintain individual homes to entire buildings and projects to enhance user comfort and experience.
Shrinking economy, insufficient funding, unsold inventory, the challenges are many. Is the industry headed for consolidation?
The pandemic has augmented the already existing challenges for developers who were grappling with huge unsold inventory, high costs of funding and delayed and incomplete projects. Post the pandemic, buyer sentiment has further dampened owing to job insecurity and salary cuts. At the same time people are opting for ready-to- move in homes or near completion projects of larger and more reputed developers. Taking in view the challenges being faced by smaller developers, more consolidation is likely in the residential space going forward, especially in cities with huge unsold inventory. This will largely take place in the form of smaller developers offering their incomplete projects or undeveloped lands to established and larger developers on JV or JDA basis. This ensures that large developers do not have unnecessarily shell out too much cash and that risks and rewards are shared proportionately.
Work-from-home is here to stay, atleast for a year or two. How will it impact the residential real estate market? Will there be more demand from Tier II and Tier III cities?
It is pertinent to note that not only have employers realised the need for implementing a flexible attitude towards WFH in the future, but that even the Central Government has actually shown an ability to understand its need and move at a great pace to support this. Their relaxation of various rules to help BPOs and related firms will go a long way in ensuring that these firms need not necessarily operate out of the major metros where they were prevalent so far. Consequently, there are expectations that the large labour force that had moved back to tier 2& 3 cities will stay put. Consequently, we can see two types of scenarios evolve In existing major metros, developers will need to offer adaptable and customizable spaces that can support work and/or education. Further, there is a preference for integrated and self-sufficient projects to decrease the need for long distance travel. Besides offering educational, social and medical amenities and facilities, they will also need to incorporate some options of workspaces; and In tier 2 & 3 cities, there is going to be an increase in demand from buyers that were working in the large metros. These buyers will be more discerning in their tastes and quality preferences.
Real estate contributes substantially to the GDP; plus growth of real estate has a cascading effect on ancillary industries such as cement, steel, timber, brick, building materials. What further policy initiatives are needed to propel the residential real estate sector?
The government has already taken numerous initiatives to give a boost to the real estate sector, which have created a ripple effect in the economy positively impacting other ancillary industries like steel, cement and other construction materials. However, these measures will take time to achieve their desired outcomes and we need to ensure that these are sustainable in the long run. Hence, these initiatives need to be in place for longer periods, possibly 3-5 years rather than just half a year to a full year. Importantly, it is important for all states to adopt the Maharashtra model of reduction in Stamp Duty for all real estate transactions for at least another 3 years. This coupled with rationalization of Circle Rates to reflect true market values will go a long way in ensuring the vitality of the housing sector. Other measures that need to be implemented are increased FSI provided necessary physical infrastructure is in place, prevention of speculative construction in un-planned locations and implementation of the smart cities’initiatives on a war scale in all urban areas.
What are the challenges and emerging trends in residential real estate?
Already mentioned the emerging trends in residential real estate earlier. In terms of challenges buyers are very risk averse and prefer ready to move in homes. For under construction projects, they are mainly opting for developers with a good track record of delivery. The sales process has become a bit more difficult and longer. Since mobility is restricted for many buyers, developers are increasingly using digital methods to attract them. However, whilst the buyers can create a shortlist, they still need to visit the projects and/or offices in person to close the final deal. Dispersion of their clientele has also made it difficult to gauge the demand and preferences of clients. Developers may need to venture into new markets for growth. Reverse migration and general slowdown in the economy are making it difficult for developers to meet their project timelines resulting in stress on their cash-flows and future plans. Access to capital remains a concern for most developers, except for established and large developers. Hence, delayed and stuck projects are still facing huge challenges in completion. There remains a high need for consolidation and professional management, which is difficult because of valuation mismatches, multiple ownership interests, lack of proper documentation, and legal hurdles, amongst others.
It seems whatever the sops initiated by the government and the private players are insufficient to elicit buyers’ interest. How can the potential fence sitters be converted to buyers?
Fence sitters were waiting for clear signals that markets have bottomed out and that prices will not reduce further. The pandemic has provided that. They can be converted into buyers, if the State Governments allow Circle rates to reflect the true capital values for projects so that developers can also offer genuine and upfront discounts. Further, a reduction in Stamp Duty across all markets will ensure that they receive a further incentive as this will be a limited time offer from the State governments.