Surging prices shift investors towards under-construction properties over ready inventories

In the immediate aftermath of COVID-19, a sense of homeownership coupled with surging rental yields and quick returns pushed more investors towards ready properties.

The post-pandemic jump in demand for ready-to-move-in flats has run up against the wall of rising cost. Experts say currently, they are witnessing a considerable shift in investor preference towards more affordable under-construction properties, driven by rising real estate prices.

According to a report by property consultancy Knight Frank India, average home-purchasing costs in the country increased 5.9 percent year-on-year during the third quarter of 2023, the second-highest pace of growth in Asia.

For example, in Bengaluru's posh Indiranagar area, local brokers say the  rates for ready-to-move-in housing is anywhere from Rs 18,000 to Rs 30,000 per sq ft.  However, several flats of 1,000-2,400 sq ft are being quoted at a whopping Rs 50,000-62,000 per sq ft, bringing the cost of the apartments to Rs 5-14 crore. In comparison, an under-construction apartment can be had for Rs 14,000-15,000 per sq ft.

"As a result, the majority of queries we are getting from homebuyers or investors are for under-construction properties which are typically priced 15-20 percent less than ready properties," pointed out Kiram Kumar, vice president of Bengaluru-based Hanu Reddy Realty.

Prashant Thakur, regional director and head, research, at property consultancy ANAROCK Group, said that most people preferred to buy a ready property before the pandemic, when homebuyer confidence was at its lowest amid delays and stalled projects. Additionally, in the immediate aftermath of COVID-19, a sense of homeownership coupled with surging rental yields and quick returns pushed more investors towards ready properties.

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"But in the last one to two years, we are seeing a trend reversal with buyers now opting for newly launched projects as well as under-construction ones, especially with the regulatory forums like RERA in place," he added.

As per ANAROCK’s recent consumer sentiment survey, demand for ready homes is seen to be on a decline and stands at the lowest end of the buyer’s preference chart. As of the second half of 2023, the ratio of ready homes to new launches stood at 23:24. This indicates a trend reversal compared from the first half of 2020, when the ratio was 46:18.

Demand for under-construction properties rose 7.8 percent on a quarterly basis between January and March 2024. This momentum follows a previous quarterly increase of 6.32 percent between October and December 2023, data from online property consultancy MagicBricks showed.

Prices surges

As a result of this growing demand, prices of such projects have surged by 30.6 percent annually across the top 13 cities, said Abhishek Bhadra, head of research at Magicbricks.

Under-construction properties in cities and suburbs such as Noida (7.1 percent rise quarterly), Greater Noida (6.1 percent QoQ), Bengaluru and Mumbai (5.7 percent each) witnessed the most substantial price rises in Q1 of CY2024.

This can also be attributed to a shrinking available inventory. As per ANAROCK Research, the top seven cities had a total available inventory of about 6 lakh units as of 2023-end. Of this, 15 percent constituted ready-to-move-in houses while the remaining 85 percent was under various stages of construction. Back in 2022-end, these top seven cities had as many as 6.31 lakh units of available inventory of which 17 percent were ready units while the remaining 83 percent were under various stages of construction.

In response to this evolving demand, we have observed that developers are swiftly expediting the completion of under-construction projects and launching new ones, Bhadra added.