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Real estate year-end review and the outlook for 2014

Anuj Puri, Jones Lang LaSalle India, writes about the subdued demand for real estate in India in 2013 and how affordable homes and redevelopment will be the buzzword next year.


Anuj Puri


Jones Lang LaSalle India


Lack of confidence reduced investor interest, but empowered end users:


The year 2013 was a drag for the Indian economy with poor macroeconomic conditions. Slowing income growth, sustained weakness in the rupee, sky-rocketing inflation and high borrowing rates combined to make consumers vary of spending.


This reflected visibly in the Indian consumer confidence index, which has been falling consistently over the last three quarters.


Housing absorption statistics the first three quarters of 2013 also reflect this trend in consumer sentiment - from a largely positive QoQ growth to largely negative growth as of 3Q13.


Despite this, residential property prices continued to exhibit upward movement even as the weakening rupee steadily eroded purchasing power.


Over the last four years (from the trough of 2Q09 up to 3Q13), taking into account the period of economic slowdown, apartment prices have risen by over 50% on an average across India.


As a result, absorption remained subdued during 2013 (until 3Q13), falling further from the already tepid levels observed during the same period last year.


This was particularly true of cities where new supply rose sharply. However, affordable markets such as Kolkata and a few emerging locations near city peripheries, witnessed better absorption rates.


Preliminary data indicates that a subdued sentiment continued into the 2013 festive season (the initial few weeks of the fourth quarter) when developers typically sell around a third of their annual inventories.


2014: Outlook


Time to match demand with relevant supply:


While the India’s gripping urbanisation growth story has been fascinating global investors so far, an underlying truth gradually emerged in 2013 - economic growth, the consumption story and property prices may not rise consistently, and there could be intermittent hurdles or growth risks.


The presently cautious market sentiment is likely to continue, as headwinds to growth will prevail at least until the first half of 2014.


However, the second half is likely to witness gradual revival in absorption. Residential real estate capital values will increase in a subdued range of 10-12% year-on-year pan-India for the whole year.


Affordability will drive growth in 2014


An emerging economy is never short of opportunities, and it is time that the Indian residential real estate industry realises where the opportunity lies. To date, the shortage of homes in India stands at around 19 million units, and 95% of this housing shortage is in the economically-weaker section (EWS) and low-income group (LIG) categories.


In India, housing for EWS is defined by the Technical Group on Estimation of Housing Shortage as having a carpet area of 21-27 square meters; LIG housing includes units of 28-60 square meter carpet area.


By the government's definition, EWS housing falls in the range of INR 4-10 lakh. This means that development of affordable housing will have to penetrate into the deeper suburbs of our cities, where such price points are feasible.


The TATA Shubh Griha project (popularly known as Nano homes; completed in 2011) in Boisar near Mumbai was a splendid example of successful identification and auctioning of such opportunities. The project had 1,300 units, which received applications from 3,500 households.


A recommendation to the government by the technical group to incentivise such projects by subsidised land, tax rebates, grants per supply of dwellings, etc. could help developers in improving the feasibility of such projects.


Redevelopment activity to increase


With scarce availability of land in the urban agglomeration, redevelopment will emerge as another growth driver in a scenario the cost-and-time-intensive complexities with regards to land acquisition brought forth by the LARR 2013 amendments.


Indian cities present an exceptional opportunity for developers in this respect -- as per the latest available census data on households, only 50% of the residential units are in good condition, while the remaining are either merely liveable or in dilapidated condition.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

First Published on Dec 20, 2013 12:28 pm
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