Pankaj Kapoor examines the much needed stimulus to the Indian real estate market and the burgeoning rise in Tier-II and Tier-III cities.
The dark clouds over real estate have begun to drift away to reveal a ray of light. For the past few years, real estate has been groaning under the burden of unsold stock, exorbitant prices and lack of financing. In a populous country like India, there is no dearth of housing demand; however, the quandary on the supply side has always plagued the market.
The current phase in real estate can be seen as a point of inflection where the slackness has made way for price correction, leading to a boost in sales and increased absorption. The prevailing price point and reduction in housing finance rates have also eased entry for fence-sitters. Also, softening of commodity prices has reduced input costs and motivated developers to abstain from resorting to high prices. Adding much-needed stimulus to the property market is the lucrative salary hike proposed by the Seventh Pay Scale Commission. The deep pockets of government employees may encourage them to enter property markets they had been shying away from. As a result of ever-expanding dimensions, the real estate sector is witnessing burgeoning rise in Tier-II and Tier-III cities. With improved quality of demographics and job opportunities, the performance of these cities holds great promise in times to come.
As for the commercial sector, it is now in the turnaround phase following a general uptick in business activity.
With a positive trend in absorption, this avenue can be considered as a promising asset class.
Here are some of the inherent challenges the sector continues to face:
Will policy changes help?
Though we expect certain actions from the government, we are not too hopeful of their impact. Some expected policy changes are:
In the past, many policy changes have been announced by the government. However, most of them have failed to bring about any substantial changes. There were talks of the Trans Harbour Link and Navi Mumbai International Airport on which realty players were banking. However, the extremely slow progress on these fronts validates the fact that these are more sweet talks than concrete steps.
Looking ahead, we don´t really see the possibility of any major big-ticket projects in 2016 because the players in the luxury segment are now shifting their focus. There is already oversupply in the luxury segment and inventory overrun can be seen in the data. Developers in South Mumbai who used to offer three-to-four BHKs are now shifting to compact two-BHKs and comfortable one-BHKs. With the exception of Bengaluru and Pune, low sales velocity and marginal speculative appreciation characterise the luxury segment on a pan-India basis. Delay in construction, cash crunch, speculative prices, pressure from secondary market and overall subdued demand from housing can be identified as some of the factors at play for this.
About the Author:
Pankaj Kapoor, Founder and Managing Director, Liases Foras, is a well-known name in the real estate industry with over 15 years of experience, particularly in the field of valuation, risk assessment and forecast of the price behaviour.