The worldwide impact of COVID-19 with its resultant lockdown has created a significant impact for the real estate sector. The impact is not just limited to low sales but has also changed the dynamics of the game.
Demand for larger residential units have suddenly dropped due to many reasons, including the need to hold on to liquidity and to re-assess whether to commit a fortune for a larger residential unit - a move already labelled by some financial wizards as a dead investment.
The last quarter of 2020 saw robust housing sales across top cities in comparison to previous quarters, thanks mainly to multiple policy changes. These include discount in sales price, reduction of stamp duty by state governments and a five percent to 20 percent increase in limits for the difference between transaction price and stamp duty value for deeming income for residential units.
In addition, the interest on home loan is currently pegged at around seven percent, which is again a rarity.
In a city like Mumbai, where real estate is one of the most expensive commodities, end customers can be divided into two categories – (i) who are not bothered about prices or the state of the economy and (ii) new age professionals - whether staying alone or belonging to the double income no kids (DINKS) club.
The entire purchase strategy of these new age professionals has changed post the pandemic. They have realised that they need a compact but well-designed home, which is easy to manage and is functional to accommodate work-from-home, and at the same time, can change into a nice studio or a one-bedroom apartment by the evening.
Sales of expensive homes have been sluggish with even secondary sales in this category witnessing very weak trends, mainly due to financial issues. Developers have been quick to understand these new age requirements and have changed projects to compact housing, with studio, one- and two-bedroom structures, with complete fit outs and modular furniture.
The interior designs in these compact houses are typically creative and inspired by Japanese homes that make brilliant use of space, as land is scarce in crowded cities like Tokyo.
Some projects have been offering banquet space and small gym facilities in the building along with modular furniture, which can be converted into a working desk during the day and as a dining table in the evening. The end customer may use this space instead of traveling to the office; by evening, it can become a party place or a gaming zone.
In the recent past, people have been moving away from the joint family system, preferring to live solo or in nuclear families; rapid urbanisation, a rising student community and migrant working professionals have also contributed to this trend. This section doesn’t have the purchasing power for a larger apartment unit.
To address this, developers have smartly reduced the size of the apartment without compromising on the price. This has made developers re-chalk their strategies on the size of units they can sell.
Developers are configuring the new launches/existing phases with focus on compact houses. For example, earlier one could find a 1BHK (bedroom-hall-kitchen) apartment with a carpet size of 400 to 500 sq. ft; these days it is easy to find a 2BHK with a size of 500 to 600 sq. ft. in Mumbai's many high profile projects. The studio size too has come down to 250 or 300 sq ft. This reduced average unit size augurs well with overall unit cost within an optimal price range.
People with a particular budget in mind are happy to compromise on the size of the apartment to have their own living abode.
Also, the maintenance cost for a compact house is significantly lower as compared to a large apartment. Homebuyers, especially first timers, are in favour of this as long as it meets their housing needs. The compact housing project is not equivalent to a low-cost housing project where both the developer and the end customer get tax benefits.
Such compact homes can also have good resale potential. One can observe that investors or owners of large apartments are struggling to resell apartments at current prices. Looking at this, potential investors are sceptical of getting into large expensive apartments due to waning resell potential.
In India, buying a residential apartment is still a very big deal. People give away their life earnings or leverage a significant portion of their future earnings while buying an apartment. Hence, compact homes make sense to such buyers. Further, compact homes can provide a better rent yield than a large apartment. Overall, compact homes are a win-win for both the developer and for homeowners.The author is a Partner, Deloitte India and Rishabh Jain is a Senior Manager with Deloitte Haskins & Sells LLP. The views expressed in this article are personal