A Quick Look at the Indian Real Estate Sector, 2018 – I

One of the most globally recognised sectors, the Indian real estate market usually comprises four sub sectors – commercial, residential, retail and hospitality.

The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy.

It is also expected that this sector will incur more non-resident Indian (NRI) investments in both the short term and the long term. Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun.

Let’s take a look at how all the four sub-sectors of the Indian real estate market performed in 2018.

2018, The Year that Was for India’s Realty Market

• New housing supply estimated at 1,93,600 units by 2018 end; annual increase of 32%
• Housing sales in 2018 estimated at 2,45,500 units; annual increase of 16%
• NBFC crisis holds sector at gun-point as 2019 begins

2018 was a veritable roller-coaster ride for the Indian real estate. Despite signs of recovery across segments, the liquidity crunch – further exacerbated by the NBFC crisis – put all industry stakeholders on tenterhooks. Consolidation via mergers and acquisitions was rife in all sectors, completely redefining the concept of ‘financial health’ among players and drawing clear lines on who will survive the heat. This process will continue throughout 2019, as well.

Despite all odds, economic indicators remained positive with India’s GDP growth rate pegged at 7.3% in 2018. CPI inflation, a major concern in the past, remained reined in at a manageable 4.8%. GDP growth and contained inflation are generally considered panacea for most real estate woes. However, it took a lot more than that for real estate to retain even a semblance of an even keel in 2018.

The initial agony of policy overhauls like RERA and GST faded, leaving in its wake a reluctantly more transparent and efficient real estate market environment. While affordable housing took centre-stage in residential, co-working emerged as the new poster boy of commercial real estate. Logistics and warehousing saw significant growth. Despite minimal new supply in 2018, the retail real estate sector held it is own on the back of conducive FDI norms.

Coming as it did almost at the end of the year, the NBFC crisis put an entirely new spin to India’s 'cautiously optimistic outlook' and as of now, it shows no signs of relenting. The Indian real estate sector enters 2019 with a gun to its head. Strong intervention from the Government and RBI is definitely called for.

Commercial Realty: Ensures Consistent Steady Growth 

In terms of market traction, commercial real estate retained its status as the most buoyant sector in 2018 across major cities. Demand for Grade A office space saw new highs and vacancy levels declined in prime locales.

India’s first REIT listings, now expected to happen in early 2019, will result in massive liquidity infusions into commercial office spaces. This, in turn, will prompt commercial property developers to focus more on this segment to fulfil demand from occupiers across the IT/ITeS, BFSI, manufacturing and co-working sectors.

Big-bang boosters like the start-up revolution and Smart Cities scheme helped create a lucrative environment for businesses to work and expand, inevitably increasing demand for office spaces. Proactive Government policies further increased the ease of doing business in India, revving up the confidence of global entities.

Concurrently, office real estate in most Tier I cities emerged as strong investment options for producing higher yields than the other segments of real estate. The increasing presence of institutional investors in India’s commercial real estate space helped improve governance, making it more structured and transparent.

• Office Absorption - As per ANAROCK data, total office absorption across the top 7 cities is geared to cross 39 mn. sq. ft. in 2018, given that 28.2 mn sq. ft. were absorbed until the third quarter. This denotes an annualincrease of 19% in absorption.
• Office Supply - The top 7 cities are expected to see over 32 mn. sq. ft. of fresh office supply, basis 26.1 mn. sq. ft. absorption till Q3 2018.

Bengaluru retained its top position in 2018, with more than 8 mn. sq. ft. of new supply in 2018. Office absorption in Bengaluru is expected to cross 11 mn. sq. ft. by the end of Q4 2018, denoting a massive annual increase of 37%. The city’s large talent pool, its vibrant start-up culture, ample Grade A office stock, relatively affordable rents and steady demand from the IT/ITeS sectors, BFSI and co-working spaces prompted this growth.

 Residential Real Estate: Affordable Housing Plays Pied Piper

The fallout of RERA and GST was still very visible in 2018, but the dust began to settle. With developers and brokers accepting the new market realities and beginning to fall in line, the residential sector began to regain visibility and viability. Transparency and accountability – never the defining characteristics of Indian real estate – became the 'new normal' this year, and the market reacted positively. 81% respondents in ANAROCK’s Consumer Survey, which covers both resident and non-resident Indians (NRIs), believe that Indian real estate has become more credible and efficient.

Even though sales and new supply picked up q-o-q across the top cities, the issue of stalled projects showed few signs of resolution in 2018. However, a number of landmark court judgments strongly indicated that the Indian legal system is awake and aware of the problem. 2018 was a year where consumers, previously held hostage by lack of efficient regulation, finally felt that they are being heard and represented. As is always the case, the process of resolving a problem starts with acknowledging that a problem exists.

Average property prices remained largely static across the top 7 cities in 2018. In fact, average property prices at the pan-India level saw only 1% increase in 2018 as against the previous year, from INR 5,491 per sq. ft. in 2017 to INR 5,545 per sq. ft. in 2018.

At a city-level too, average property prices hovered mostly around the same levels in 2018 versus last year. Q-o-q trends also suggest that there was no headwind change across cities – remaining well within 3%.

Affordable housing, backed by a series of government sops during 2018, kept the residential supply momentum ticking. In sharp contrast to earlier years where the ‘affordable’ tag was considered down-market and avoidable, 2018 saw almost every real estate developer – regardless of market footprint and previous category orientations – eager to take a bite out of the affordable housing pie.Source: ANAROCK Research

• As per ANAROCK data, the new launch supply across top 7 cities is estimated to be 1,93,600 units by the end of 2018 – at 1,46,850 units in 2017, this is an increase of 32% over the previous year despite all headwinds.
• Affordable housing accounted for the lion’s share of this supply with over 41% of the new supply coming into this category.
• Housing sales in 2018 are estimated to be 2,45,500 units if we consider Q4 sales to match those of the preceding quarter – at 2,11,140 units in 2017, this is an annual increase of 16%.
• Unsold housing stock stood at 6.87 lakh units in Q3 2018. Considering that unsold housing stood at 7,44,000 units in Q3 2017, the decline is a modest 8% over the previous year.
• Ready-to-move-in properties garnered maximum buyer interest, with ANAROCK’s Consumer Survey indicating that 49% property seekers are intent on buying RTM homes

 To be continued in part 2.

 Source: Anarock Research