India’s Residential Revival

Residential continues to be the real estate darling in times of adversity, and the story is no different in India. Real Estate Industry players are pleasantly surprised by the revival or uptake of residential sales throughout India. During the latest GRI Club Real Estate India eMeeting, members discussed their expectations of the recovery taking a more V shape form with the demand levels seen in January and February likely to sustain. There has been a total quarter-on-quarter growth of 34% across the country and a Y-o-Y increase of 60% compared to the similar period of previous year.

Chennai, for instance, has recorded a 200% sales growth, while Mumbai and NCR put together have recorded 50% sales in India. Bangalore has also experienced a 50% sales growth in comparison to Q2, exceeding the pre-COVID sales numbers. Sales have been strong even in the luxury segment, where it may be attributable to the sentiment arising out of COVID that having larger houses makes sense if the family members were all to work from home. Residential projects have also received good attraction from online sales. Not only has sales have gone up, but more than that the footfall at the sites has also increased which is very encouraging.

Residential Sales Exceeding Expectations 

The question that arises amongst members is whether the sector expected this spike in sales, which seems to now become a trend? After the vaccine was announced the industry expected more positive news to follow. However, players did not anticipate the record growth that exceeded their expectations. Nevertheless, players believe that it is the pent-up demand that is currently being satiated, and if these sales numbers continue over the next 12 months, then there is possibility of the sector to sustain as well. Few players however are bullish on the long and short run toward the residential sector

Increase in velocity

There are various reasons that have led to increased velocity in sale of residential properties. These can be clubbed in four reasons, (i) government incentives, (ii) reduced mortgage rates, (iii) the WFH effect, and (iv) increase in disposable income. The Government has come out with a decent amount of incentives to promote residential sales specifically in Maharashtra with the reduction in stamp duty. The decrease in mortgage costs have been a huge factor for salaried people. With the steady income it has become easier to make the EMI calculation work. 

Work from home did give an advantage to the residential sector by the virtue of the fact that people started wanting to buy ready to move properties quickly, specifically when there was a question of quality and size improvement due to all the members working from home. Primary investment products are essentially real estate, stocks, shares and gold. The way the stock market has substantially gone up the past couple of months, there is a certain amount of profit booking which has found its way to another investment product being real estate. 

Disposable income during the pandemic period has gone up substantially with most professionals working from home. Almost none of these professions have lost their salaries or faced a salary cut and with not many investments options, real estate has attracted investors. Work from home policies truly energized the segment and the benefits given by the government gave the real push to take the residential sector to the next level.

Pricing and Sales

Every developer is trying to lower their risk and make sure there are enough sales to meet its financial costs. Developers are still under a lot of financial pressure given the LTV and loans creating a constant pressure to sell out debt. They also want to get rid of their inventories. Developer partners are advised to secure sales at whatever price in which they can sustain.

The main sales drivers are mortgages, followed by buyers having a sense of the deal making as prices have stagnated for more than 4 - 5 years and believe that they are getting a good deal now. The bulk of the sales are concentrated in two categories: apartments that are completed or near completed and under-construction properties. The consumers that were waiting for the prices to go down, correct, or receive more incentives to buy started believing that the market has finally hit bottom. Hence, these buyers that were sitting on the fence have fallen over resulting in sales. Nevertheless, members believe that one can’t be too bullish or not modelling out more than a few percentage price increase. At a sector level there is still a lot of overhang, a lot of baggage and fair bit of debt required for a continued momentum of sales and sustain debt,

Underwriting prices and margins

When underwriting, lenders and investors are not building in a price hike, but instead an increase in velocity. From the underwriting perspective, there are two large variables: what kind of velocity and what kind of price the property can achieve. If interest rates are maintained at this level, speed would also increase and sustain this trend. With the government’s big push in the infrastructure sector, what needs to be watched over the next few months is how this will impact the margins. The focus of underwriting is likely to shift from price to margins. 

Liquidity squeeze

While interest rates have come down, the money is not available to everybody. This fact is clearly coming out in the marketplace, as there are many builders who were not able to source funds. There are failures in the market in terms of completion of projects and ability to start projects. While the Swamhi fund has undertaken efforts in providing liquidity, it is not sufficient to meet the sector’s full requirement. Small-and-medium-sized developers are struggling to get access to liquidity with some of them wanting to cash out. As a result, the new business is moving towards well capitalized developers. 

Fund raising

Due to the money paucity, not only consumers want to go with viable developers but also even the lenders are making a similar choice. Real estate lending is moving towards project financing.

Nevertheless, foreign investors have little interest in greenfield and equity investments for residential.  Whenever there has been institutional participation in the residential projects, the investors had to take a hit due to time and cost overruns.

The banks today are looking at early-stage investments for construction. Everything is about early-stage now, given that for banks it’s a struggle to refinance. Most special situation funds are looking at early 20% returns and sellers are looking at 14 to 16% returns. Even with the sellers ready to take a little haircut, the mismatch in commercial terms continues. 

In a portfolio deal, the negotiation points are around the aspects of the right level of financial or legal DD done or the ability to incorporate governance rights. Having to undertake the process all over defeats the purpose of doing a portfolio deal for the investors. As for brownfield, though remains difficult, it is still the preferred structure for investors as opposed to greenfield. There are investment opportunities and hopefully real estate investors can tap into these potentials to continue bolstering the residential sectors growth.