Dip in Residential Market

What will it take to revive Demand in Real Estate?

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What will it take to revive Demand in Real Estate?

The dip in demand for residences led to an oversupply situation in certain markets.  

Demand for residential units in India was austere throughout 2012 but Crisil Research expects it to recover gradually in the next couple of years. This will be driven by a better macroeconomic outlook, and increased buyer interest arising from the implementation of the Real Estate (Regulation and Development) Bill, 2013, which will ensure more timely delivery by developers and greater market transparency (in terms of disclosures). On the macroeconomic front, gross domestic product (GDP) growth is expected to improve in 2013-14; moreover, interest rates and inflation also appear to be softening. This will result in better access to home finance for buyers, primarily end-users. But developments on the infrastructure front, such as construction of new roads and highways, airports, retail spaces and commercial activities, will also act as demand drivers for the investor community.


The situation thus far

The global economic turmoil had caused ripples across several asset markets, namely equities, debt, commodities and real estate, during the last two-three years, which hampered consumer sentiment and lowered overall demand. The resultant dip in demand for residences also led to an oversupply situation in certain markets; while developers themselves decided to go slow on execution of projects in a few other markets.

Delays in handover of projects, in many cases, eroded buyers’ confidence and increased the demand for projects either nearing the completion stage or ready for possession. Buyers also began to increasingly prefer developers with a pan-India presence and an established track record. Thus, overall absorption of residential units across the top 10 cities, (as per a Crisil Research) declined by 6% year-on-year in 2012. Average prices too were higher only by 3-5% compared with levels in 2011.


Residential demand to be driven by end-users

According to a Crisil Research study of India’s top 10 cities, residential demand is largely driven by end-users in most cities; however, in regions such as Ahmedabad and National Capital Region (NCR), investors constitute nearly one-fourth of overall demand for residential units. End-users typically choose locations based on proximity to social infrastructure, such as educational institutions and healthcare centres, convenient modes of transport and better connectivity to key locations in a city. Development of infrastructure, which includes construction of roads and highways, national expressways, Metro rail and airports, is expected to be a key driver for residential demand in the near future.

For instance, the introduction of the Metro rail will significantly boost demand for residential units located around Metro stations, particularly in cities such as Bangalore, Kochi, Mumbai and Pune. The development of the Outer Ring Road and elevated expressways has enhanced road connectivity, which could drive up residential demand in Bangalore. Similarly, proximity to Mumbai, relatively affordable rates, and the new international airport at Rajgurunagar will boost real estate demand in Pune.


Investor interest to gain momentum, preference for real estate to increase

In contrast to end-users, investors consider the potential appreciation in capital values in a particular region while making their purchase decisions. Non-resident Indians form a large section of the investor community, mainly in Kochi, Hyderabad, Chandigarh, Mumbai and the NCR region. In addition, people looking for a second home in the same city or neighbouring cities also pose as investors.

In the wake of the global economic slowdown, investors had pulled out from most markets; however, with domestic GDP growth expected to improve, the slight recovery in the US economy and the depreciation of the rupee, investor demand is likely to gain momentum. However, political disturbances and unfavourable regulations could play spoilsport. Home buyers—both end-users and investors—also consider the ongoing political scenario and regulations while making decisions. For instance, the ongoing deadlock on the Telangana issue led to subdued demand and an uncertain political scenario, which resulted in average residential prices bottoming out in Hyderabad.


Real estate Bill will boost buyer confidence...

The real estate Bill will improve buyer confidence by incorporating mandatory disclosure clauses as they will have more clarity regarding the standards of the project as well as regarding completion timelines.

For developers, while this Bill means stricter regulatory control it also means better demand due to improved buyer confidence. In terms of supply, execution delays for projects are expected to reduce as the clauses mentioned in the Bill will require strong commitment from the developer to complete the project as per schedule.


...but developers also have their work cut out

Notwithstanding a likely improvement in customer sentiment arising from the improvement in macroeconomic conditions as well as the implementation of the Bill, the onus on improving demand lies primarily on developers. In addition to ensuring timely handover of projects and greater transparency, developers will need to evolve innovative schemes to sustain the growth in demand for residential properties and retain consumer interest.

Binaifer Jehani is director, Crisil Research 

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