What's in store for potential home buyers in the coming years | Tomorrowmakers

Want to know how India's changing landscape is affecting property trends? Read on to find out what might be in store for you in the coming years.

What's in store for potential home buyers in the coming years

Activity in the real estate sector has been rather muted over the past 4-5 years as it reeled under falling prices and subdued sales. Sales have been on a downward trend since 2013-14 when an average of 3.3 lakh units were sold annually. During 2015-16 only 2.7 lakh units were sold on an average, registering a 17% annual decline. From then on, the downward trend has continued, increasing the unsold inventory across the top seven cities of India.

The average sales between 2013-14 and 2017 has dropped by 40%. Some notable trends pertaining to average sales during this period in the seven key cities include:

  • NCR (National Capital Region) and MMR (Mumbai Metropolitan Region), which were heavily driven by investor activity, recorded a massive drop of 68% and 27% respectively
  • Bangalore and Chennai, also on investors’ radar, saw average sales decline by 17% and 45% respectively
  • Pune, which witnessed exponential growth due to significant interest from investors and NRIs who purchase houses only for financial gains, also saw a decline of 29%
  • In Kolkata, a primarily buyer-driven city, sales saw the smallest decline of 12%
  • Hyderabad, another buyer-driven city, was the only one to show growth at 32%

In November 2016, the government’s crackdown on illicit and counterfeit liquidity – demonetisation and Benami Transactions (Prohibition) Amended Act – exacerbated the stagnation in the residential real estate sector, then considered a safe haven for black-money. The following year, the Real Estate Regulation (and Development) Act (RERA) in May and the Goods and Services Tax (GST) in July led to confusion about the scope and application of the legislation. Buyers deferred buying, while developers held back on new launches, both awaiting clarity on the state-level legislation of the regulations. This affected the business cycle through most of 2017, as sales continued to fall.


Trends specific to 2017 across the top seven cities include:

  • Supply of new projects fell significantly from 2.4 lakh units in 2016 to 1.25 lakh units.
  • Prices remained range-bound due to a large pile of unsold stock and low demand on the back of cautious buyer sentiments. Exemption of additional charges, waiver of stamp duty and registration charges, free modular kitchens and white goods, and other such promotional announcements led to attractive offers.
  • A policy-level impetus encouraged more developers to focus on affordable housing. The majority of new launches were in the affordable (45%) and mid-range price segments.
  • Awaiting clarity on tax implications and GST on under-construction projects, buyers preferred ready-to-move-in projects to avoid execution risk. There was an increase of 25-35% in inquiries and sales traction for ready-to-move-in homes in the last two quarters of 2017, compared to the previous quarters.
  • As developers focused on clearing the piled-up inventory with restricted launches, the unsold stock reduced 6-9% year-on-year across the seven key cities.
  • Compliance and declining housing demand led to the exit of financially small and weak builders, landowners, and brokers. Furthermore, debt pressure, execution failure, and other financial challenges led to bankruptcy and insolvency of many developers.

What's in store for potential home buyers in the coming years

The sun hasn’t set; instead, it’s the dawn of a new era of market revival. Transparency on the back of improved regulatory framework has attracted the attention of both global and Indian investors. As reforms continue, the prevailing lacklustre trend is likely to ease, and the industry reshaped to a more consumer-friendly market. India ranked fourth in developing Asia for FDI inflows as per the United Nations Conference for Trade and Development (UNCTAD) World Investment Report 2016. India’s tier I cities moved up to the 36th rank in JLL’s 2016 biannual Global Real Estate Transparency Index.

There is also a resurgence of tier II and tier III cities in the wake of seeing increasing economic activity, infrastructure growth, and reduced emigration to the metros. Listed below are a few smaller cities that hold considerable growth potential due to their key growth drivers:

What's in store for potential home buyers coming year

The present is looking up already

In the first quarter of 2018, 33,000 new units were launched registering an increase of 27% q-o-q across top seven cities, indicating optimistic sentiments amongst developers. With clarity on GST and RERA legislations and quicker clearances and approvals, buyers understand that timely new launches are critical for the secured approvals to not lapse.

Within the seven key cities the following trends pertaining to the new launches in the first quarter of 2018 were observed against the previous quarter:

  • Key cities collectively contributing to a majority (66%) of the new unit launches included MMR, Bengaluru, and Kolkata.
  • MMR saw a 25% decline, as the erstwhile intensely investor-driven city is aligning itself to the changing market conditions with 87% unit additions in the price bracket under Rs 1.5 crore.
  • Bengaluru saw a 27% increase, in line with the city’s tendency to rapidly adapt to changing market dynamics to be well-positioned for growth.
  • Kolkata saw a three-fold increase attributed to a large (3500 units) affordable housing project.
  • Chennai had more than a two-fold rise on the back of political stability and elimination of input material issues.
  • NCR had 18% increase as it reorients itself to actual housing demand, with 94% unit additions in the price bracket under Rs 1.5 crore.
  • Pune saw a 29% increase as developers in this historically stable market are carefully calibrating the supply to avoid creating a serious demand-supply mismatch.

If the current trend is matched with an equally rapid revival in the pace of demand, the momentum in new launches could continue. The supply is visibly geared towards buyers, indicating a significant shift from the previous investor-driven orientation. The increase in launches in the top seven cities has already resulted in a 2% decrease in the overall unsold inventory to 7.11 lakh units.

In continuation of last year’s post-RERA observation, the share of tier I developers increased to 40% in the first quarter of 2018 from 35% in the previous quarter. Penalisation for a delay in timely execution is deterring small and unorganised players, but RERA is boosting organised players on the back of their compliance and financial soundness.

Sales increased 12% annually to 49,200 units in the first quarter of 2018, with NCR, MMR, Bengaluru, and Pune together accounting for 80% of sales.

Signifying a revival in demand, trends within the seven key cities between the first quarter and the previous quarter indicate:

  • Kolkata’s sales increased by 42%
  • Sales in Bengaluru and Pune increased by 15%
  • Sales in MMR rose by 12%
  • Sales in NCR increased by 11%
  • Sales in Hyderabad remained almost stagnant
  • Chennai was the only city that recorded a dip in sales at 12%

Residential property prices across the top seven cities continued to remain range-bound primarily due to the significant unsold stock in the backdrop of limited improvement in demand. Affordable and mid-segment housing continued to dominate, accounting for 74% of unit launches at 24,600 units.

What lies ahead

The spate of regulatory and structural reforms since 2016 has weeded out investors, particularly speculators, to pave the way for genuine home buyers. Noticing the opportune environment, buyers are likely to continue to remain in the market to fulfil the quintessential Indian dream of owning a house. This trend is likely to be strengthened amidst limited new launches. Interestingly, the practice of pre-launches and soft launches have come to an end.

The impact of sector-level policy initiatives will unfold with consolidation in the sector. More joint ventures and developments are likely as large players will acquire financially distressed developers to present a new competitive landscape. Completion of existing projects, on time to avoid penalties under RERA, will be prioritised over new launches. So, developers will re-engineer their business processes to streamline delivery services, without spreading themselves thin in terms of debt or scope of work.

Now recognised as a component of the infrastructure sector, affordable housing will attract more prominent developers, further encouraged by tax incentives, to realign their products to compete. Increase in carpet area will benefit buyers while an interest subsidy will benefit sellers as inventories are cleared. Affordable housing will, therefore, become an important segment in every developer’s portfolio.

 

Developers could also focus on their niche expertise in the new year, specialising in the various segments of real estate, e.g., plotted developments, residential projects, townships, and commercial spaces. Hence, specialist service providers could emerge in each of these categories.

With the implementation of GST and uncertainty on the input tax credit (ITC), homebuyers are likely to pay more than before. The uncertainty and delay in delivery of under-construction projects have made home buyers gravitate towards ready-to-move-in projects. As 1.7 lakh units are likely to be completed in 2018, home buyers could be spoilt for choice, with an extensive range of both ready-to-move-in and near-complete projects to pick from.

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