Demand-supply mismatch still plagues Indian Residential

Following a recent GRI Club India Club Meeting on the 22nd of October it’s moderator, MD & CEO of ANAROCK Shobhit Agarwal, shared some of his thoughts regarding Indian Residential assets in the current market.

“Indian residential real estate is currently at the crossroads where immediate strategies need to be in place for faster and smoother recovery for developers at large. It instantly calls for in-depth understanding of the changing dynamics within residential real estate – of demand, supply and inventory – and thereafter strategising their businesses accordingly. At the onset, to stay relevant, most developers have realized the changing consumer demand and hence they have altered their offerings by bringing in new supply that caters to a wider audience. 

However, their past mistakes - of late 2000s and largely up to 2013 wherein they added new supply as per their whims and fancies – ultimately resulted in demand-supply mismatch which is still holding many to ransom. It has created a massive unsold pile of almost 6.56 lakh units as on Q3 2019 across the top 7 cities alone, as per ANAROCK data. While there is a gradual y-o-y decline in this stock, it continues to plague the residential real estate market.

That said, things are changing. To put things in perspective, developers are not only aiming for the right budget categories, but they have also fine-tuned apartment sizes as per consumer demand. As per data, average apartment sizes across the top 7 cities have shrunk by over 20% over the last four years (between 2015 and 2019 till date). This is when there is almost zero appreciation in capital values, suggesting that properties ideally should have become affordable by roughly the same percentage. In such a scenario, it should have ultimately resulted in an increase in absorption. However, the numbers suggest differently. Total absorption in top 7 cities reduced by 18% for the first three quarters of 2015 and 2019, which means that the total sales value for the same period also reduced by as high as 47%, without considering the GDP growth and inflation rate.

 

So, what is causing slow sales in Indian residential?

The significant reduction in residential sales in comparison to the peak years is largely due to the shaken customer confidence. Besides macroeconomic conditions which to a large extent impact consumer sentiments, the issue of delayed/stalled units across the country is becoming a major concern. Just the top 7 cities alone have more than 5.7 lakh units either completely stalled or delayed for multiple reasons. Of this total delayed/stalled units, nearly 1.74 lakh units are completely stalled with no ongoing construction in them while the remaining are running much behind schedule. All these units were launched either in 2013 or before. This is reason enough for consumer trust to be weary.

However, the silver lining in such a situation is that developers have become cognizant of the prevailing issues of high unsold inventory and project delays. More than anything, they realize that if their new supply is not met with enough demand, the situation will only worsen further. Hence, they have significantly curtailed their new launch activity and instead are consciously focusing on clearing their previous unsold stock. As a result, the new supply of units has reduced considerably from almost 5.45 lakh units in 2014 to less than 2 lakh units in 2018. The major new supply reduction happened post the reformatory changes since 2016.

One of the immediate positives of this new strategy of developers is reduction in unsold inventory - from nearly 7.90 lakh units in 2016 to nearly 6.56 lakh units in Q3 2019. The reducing inventory levels are clearly a positive sign but reducing the new launches is just half the solution.

 

How to beat the odds!

Keeping in mind the limited availability of NBFC funding and selective approach adopted by equity investors as well, developers need to focus on reviving demand without which the situation will continue to remain challenging. Even while the government has doled out innumerable measures in recent past to boost consumer demand and confidence, developers too will need to tighten their belts. Even while there are no quick-fixes to this problem, they can at least strive to prioritize three major points. 

• Make cash flow #1 priority.

• Focus on project delivery; it will positively drive customer confidence and invariably result in boosted sales of not just ready inventory but also those under construction.

• Corporate governance is no longer a jargon; it is a way of life (to attract demand and funding both).” 

 

For more information and discussion on the Indian real estate market, join the most important players in the region at GRI India Real Estate Leaders Forum 2019, taking place on 20 November in London. GRI Offices & Parks India takes place on the 23 April 2020.