Here’s why luxury housing is gaining traction

Demand for larger apartments has gone up after the pandemic, while builders also increase their realisations from the sale of luxury homes.

Luxury housing in India is in the midst of a multi-year rally and real estate developers are cashing in on the increasing demand.

The higher realisation (price per square foot) for developers reflects the preference for bigger and premium homes, said experts, adding that the buyers are mostly those who want to upgrade to larger apartments.

A recent report by Anarock noted that unsold units in the luxury segment, priced above Rs 2.5 crore, declined 24 percent to 15,520 at the end of March from 20,480 units a year earlier. At the end of March 2019, the unsold stock was about 23,130 units.

Rating company Crisil noted that sales by large listed real estate developers rose by almost 50 percent in value terms in FY23, while the area sold increased about 20 percent. These large developers are poised to increase their market share to about 30 percent in FY24 from 16-17 percent in FY20.

“Credit risk profiles of large developers have also benefited from liquidation of inventory amid healthy sales growth in the past two fiscal years. With robust collections leading to reduced debt, their leverage has improved substantially with their debt-to-total assets ratio expected at around 20 percent by March 2024 compared with around 45 percent at the start of the pandemic,” said Pranav Shandil, associate director at Crisil Ratings.

Crisil studied 11 large and listed developers and 76 small and mid-sized residential developers, accounting for 35 percent of residential sales in the country. The six regions/cities covered were the Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Bengaluru, Pune, Kolkata, and Hyderabad.

According to Aniket Dani, director of Crisil Market Intelligence and Analytics, consumer preferences have shifted to larger and bigger configurations in premium housing projects after the emergence of the hybrid work culture after the pandemic.

“In sync with this trend, large established developers have also gradually aligned their new launches to premium projects,” Dani told Moneycontrol.

Pankaj Kapoor of Liases Foras said that of 63 listed real estate companies, five to 10 A-grade firms may launch luxury projects because of the good margins.

“The market has evolved over a period of time and a healthy offtake has been seen in the luxury segment,” he said.

Vivek Rathi, director of research at Knight Frank, said luxury home supply is largely influenced by real estate developers and demand. This trend has gained traction on account of renewed interest towards home ownership. Developers are able to ensure volumes as well as price growth in this segment.

Supply tends to follow demand and the trend of luxury housing demand outstripping that of mid-range and affordable housing has been quite consistent since the pandemic. Buyers in this segment are skipping the upgrading cycle and going straight for the best homes available.

“This trend is not uniform across cities. Midrange and affordable housing are doing well, but the sales velocity of high-end offerings in the top seven cities definitely stands a class apart currently,” said Santhosh Kumar, vice chairman at Anarock Group.

Ritesh Mehta, a senior director at Jones Lang LaSalle, is of the view that luxury projects in South Mumbai are mainly from redevelopment of existing societies and their members prefer to go with listed real estate firms. A luxury project is highly capital intensive and deep pockets are required. Also, most units are sold closer to their completion and that requires a strong holding capacity.

“Only a listed developer with a low borrowing rate will have that capability. Also, in terms of margins, while a conventional project commands a margin of 18 percent, a premium project will command 28 to 30 percent margin,” he said.

According to ICICI Securities, Oberoi Realty clocked Q4 sales bookings worth Rs 670 crore, with the 360 West Worli project contributing Rs 230 crore. In February, the company completed the purchase of 50 percent of the residual inventory in the 360 West project from Oasis Realty, the JV entity where it held a 32.5 percent stake, for Rs 3,400 crore.

Oberoi Realty will sell its portion of the inventory to its customers and revenue/EBITDA will now be fully consolidated as opposed to the 32.5 percent associate share earlier.

“We model for total sale value of Rs 70.3bn over FY24-FY27E with post tax NPV of Rs 41.3bn,” ICICI Securities said.

Along expected lines, DLF clocked record FY23 bookings of Rs 15,100 crore, driven by the stellar response to the Arbour residential project in Gurugram in the fourth quarter of FY23, which contributed Rs 8,000 crore.

Given the strong FY23 performance, DLF has enhanced its launch pipeline to 41 million square feet from 35 million square feet and expects bookings of Rs 11,000 crore-12,000 crore in FY24E. This hinges largely on 3.5 million square feet of the Crest 2 luxury project to be launched in the second half of FY24, with an estimated sales value of over Rs 10,000 crore, the analysis said.

During an investors’ call, Macrotech Developers, formally Lodha Developers, said its Malabar luxury project was able to cross the Rs 1,000 crore sales mark.

Boman Irani of the Rustomjee Group said in an interview to Moneycontrol that it plans to launch seven projects, of which two will be in the luxury segment where the price bracket will be Rs 10 crore-plus.

A few years ago, the company bought a sea-facing bungalow near Taj Land’s End Mumbai for Rs 350 crore from the Bandra Parsi Convalescent Home Trust. A luxury residential tower is reportedly going to be constructed on this plot.