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Real Estate

India Residential Real Estate: Time to Give ROI a Boost

August 24, 2021

GRI Club members gathered online to discuss the Indian residential real estate scenario for 18, 24 months. The meeting was moderated by Sunir Ramchandani (Head - Construction Realty Funding and Asset Monetisation, ICIC Bank) and co-chaired by Pavitra Shankar (Executive Director, Brigade Enterprises Limited),  Mudumbai Nanda Kishore (Managing Director, Ramky Estates & Farms), Rohit Gera (Managing Director, Gera Developments), Pankaj Bajaj (Managing Director, Eldeco Infrastructures & Properties), Boman Irani (Chairman & Managing Director, Rustomjee Group).

Industry Today: Time for Growth and Taking the Plunge

Demand is out there, and it is not a pent-up demand. For those who have the ability to risk capital at good rates, it is the time for growth. Now is the time for companies that have been waiting for a reason to take the plunge. The sector is due an upcycle. Affordability and supply are aligned, prices have been increasing and the main challenges are related to margin protection. Overall, the industry is sensing a fundamental shift in terms of the customer outlook. There will be new opportunities, disruptions and good launches in the upcoming months. However, it is relevant to consider a dent in supply, because of quality issues and small players.

Key Strategic Points for Hyderabad Scenario

After years of unsatisfactory results (between 2009 and 2015), Hyderabad is doing tremendously well. The Real Estate market will continue to be strong, and so shall the demand for housing. The improved regulations are creating good value for end-users and buyers. 

Some strategic growth drivers that have been attracting investments and good developments in the city are: good infrastructure, great products, high level of connectivity, demand and potential to increase results, since there is a huge demand for housing. RE market is more self-regulated, so there are fewer customer issues; Hyderabad has been the first in quality of living for last 3 years;

In the last few years, much growth has been concentrated on the Eastern side - Uppal Nagole and towards the airport. Locations closer to the airport and even beyond there have attracted the best developments and good demand for villas;

There was 6-7 years of Stress in RE (prices were static), but it has seen good progress and price growth in the last 4-5 years; Good growth and lots of changes expected in the next 3-4 years. Demand for Commercial office spaces is growing;

Delhi´s Overview and Perspectives

Delhi is lagging a bit, but a recovery is expected. 
Demand is there, select markets and projects are doing well. In addition, after a long period of flat prices, it has been increasing again. It demands a healthy business model, and new partnerships with other developers in order to be focused on a meaningful consolidation.

Huge Potential at Mumbai and Great Performance

Potential in the MMR area is enormous and the region has performed very well; Pan India Developers are entering this market. In terms of sales, it continues to be high, since people are searching for houses or apartments which usually are around 7% to 8%  bigger. Furthermore, they want a better quality of life, and there is a sense of good value since customers search for new amenities for their home office and comfort in general.

Nowadays, big developers are looking at plotted developments and investments in new asset classes, such as Warehousing and Data Centers.Prices are inching up. Many premium projects are cropping up, and prices will rise. Customers are buying bigger size houses expecting the price to increase even more. Competition in Mumbai will attract more developers and there is a great expectation for better results this year and in 2022, 2023 and 2024 as well.

What goes on in Pune?

Pune has had ready to move inventory of 7000 - 8000 units every year for the last 5 years. A trend followed by people has been to buy properties under construction; Pune hasn’t witnessed run-away price rise or decline. Price has been negative over the last 5 years, however, it went up 3% in the last year. There is a reasonable degree of balance, and it is an affordable market. Government benefits were a brilliant move in the region.

Is the West less and NCR a more consolidated market? Why aren't Residential sales high in Bangalore?

Bangalore is similar to Pune - a stable market and price has not been volatile;
Commercial sector has been doing well, large companies are hiring, hence attracting customers to search for mid-segment or even luxury houses;
Post COVID demand has been coming more from the end-user demand/less speculative, and prices have been static;
There are not big movements, margins are low margins (price ranges 5000-6000 per sft); City can grow in all dimensions; Some developers are consistently churning products, and consolidation is also happening.

Beyond top 7 cities: How are Tier 2 and 3 cities doing and success mantra there?

These are 15 markets in the North of India, that are doing better than big cities; In the last one year, plotted developments prices rose 40% to 70%;

Share of sales in Tier 2 and 3 cities vis a vis total sales is expected to increase (from 15%  to 25% /30%);It is difficult to find capital in these cities, though these are more stable markets.

Is supply overhang in the sector?

There is a lot of excess supply, but much of it now seems like unwanted supply so the sales are low. The pandemic has changed customer preferences. So many are focusing on clearing above inventory by reducing prices.

Currently, 7 lac unsold units in these 7 cities, but only 50,000 in the lock-in stage. As 2.80 lac units are sold per year, that’s just a supply for 30 months and should that lead to supply shortage?

In NCR, developers are not keen to launch new projects; Supply shortage is expected in 18-24 months; Near to completion inventory is getting sold, which needs high capital; Hence, capital is a competitive advantage; Good developers are selling and plotted sales picking up; There is an appetite for credit, not enough juice for Equity Investors.

If great returns in Tier 2-3, what did IRRs achieve?

2014 onwards – IRRs of 17%, in the last 6 months has achieved IRRs of 25% as land prices have not increased parallelly; It is likely to go down to 18% in the next 6-12 months.

By Tatiana Munhoz 

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