The CRISIL report said revival in residential realty is likely to be gradual and prices are expected to remain under pressure on account of slowdown in volumes due to on-going liquidity concerns.
With limited incremental funding to the real estate sector from banks and given the current pressure on liquidity for non-banking financial companies, only developers with a portfolio of commercial assets have been able to manage their liquidity for residential projects and are expected to continue to do so, as per a report by CRISIL Ratings.
For the top 20 developers alone, support extended to the residential segment from their commercial portfolio has been around Rs 33,000 crore in the last three years, both through sale of assets and additional top-up debt in operational properties. These developers account for 90 percent of the market capitalisation in the real estate sector and have more than 650 million square feet under development, the report said.
"With demand recovery in the residential segment expected to remain muted, and the current liquidity issues in the NBFC/HFC space, additional leveraging of lease rentals and asset sales will continue to dominate cash flow support from commercial to residential segment in the near term. Real estate investment trusts, or REITs, could be another way to help developers deleverage, and the success of the first REIT will set the tempo on this option," said Sushmita Majumdar, director, CRISIL Ratings.
An improvement in end-user participation on rising affordability, increasing launch of units with mid-income ticket sizes, and implementation of the Real Estate (Regulation and Development) Act, 2016, or RERA, is also expected to revive demand for residential real estate in the medium term.
Affordability, calculated as the ratio of the property cost to annual household income, is expected to come closer to the ideal band given a moderate income growth estimated for mid-income households, says the report.
As of fiscal 2019, affordability in most cities is estimated to be in the range of 6-8 times compared with 11-13 times five years back. Ticket sizes have been coming down as developers launch units with reduced average area per house, led by both market needs and the impetus to affordable housing.
As such, capital values in the residential segment have been under pressure of late – with a decline of 5-20 percent across micro markets in the last 2-3 years – and are likely to remain range-bound because of unsold inventory.
Implementation of RERA, is also expected to give a fillip to demand, which has been lacklustre so far. With most RERA websites operational and a grievance-handling mechanism in place in key states, end-user participation is expected to improve gradually for under-construction properties as well.
In the short-term, demand is likely to remain muted and prices will remain under pressure on account of slowdown in volumes due to on-going liquidity concerns, as per the report.
"Between fiscals 2019 and 2021, residential demand is estimated to log a compound annual growth rate of less than 4 percent led by key micro markets of Bengaluru, Hyderabad and MMR. Though marginal, the growth will be driven by first time buyers eyeing units in mid income tickets typically priced between Rs 2.5 mn to Rs 10 mn," said Rahul Prithiani, director, CRISIL Research.The commercial portfolio is also seeing steady lease rentals and healthy demand. Indeed, even as investor interest in the residential segment has been fading due to limited property price appreciation and inability to monetise the assets, commercial real estate is becoming a hub for new investments. The commercial segment has also seen a good number of assets changing hands, the report said.