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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