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Real Estate Year Ender: Will Omicron cast its shadow over the gains of 2021?

Prices in 2021 by and large, remained stagnant and in some markets developers provided moderate price discounts to kick-start sales, thereby facilitating cash flows to tide over the crisis in the short-term

The year 2021 saw housing demand emanating from first-time homebuyers being supported by stamp-duty cuts in some States such as Maharashtra, Karnataka and West Bengal and multi-year-low interest rates. Larger and listed real estate developers reported a strong performance, as the trend of consolidation in the market continued.

While the housing demand trend is expected to remain in an upcycle in the near term, market-share gains for larger developers may accentuate the pressure on smaller developers, who had already been impacted by various regulatory developments in the sector over the last five years, say real estate experts.

Prices in 2021, too, by and large, remained stagnant and in some markets developers provided moderate price discounts to kick-start sales, thereby facilitating cash flows to tide over the crisis in the short term.

The resilience with which the market came back from the lows of the uncertainty emanating from the Covid-induced lockdown led to an excellent first quarter in 2021.

“Historically low mortgage rates, preference for owned homes, rising affordability and select stamp duty cuts led to the surge in demand, which helped the sector sustain through the second wave of Covid-19 and recover even more quickly in the post-Covid environment. The signs of recovery have also been captured in recent surveys, which highlight that the online property search volume in September 2021 has already surpassed the past historical peak of September 2020,” said KT Jithendran, CEO, Birla Estates.

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Impact of the second wave of Covid-19 on housing demand

The impact of the second wave, according to experts, was lower than that witnessed in the first wave due to various factors, including many salaried employees continuing to work from home, more localised lockdown restrictions, and a higher degree of certainty regarding future income levels and stability compared to the complete lockdown following the first wave.

“Perhaps the most important high point of 2021 for the Indian residential real estate market was that the business did not come to a standstill despite the second wave of the pandemic. This indicates that the steep learning curve induced over the last two pandemic years has led to superior business practices and an overall stronger housing market,” said Anuj Puri, Chairman, Anarock.

Residential Trends in 2021

Home-buyers preferred ready-to-move in homes: With the pandemic-infused economic stress and uncertainty, buyers became risk averse. There was a preferential shift towards residential properties that were ready to move in, or projects that had a low completion cycle. Buyers also gravitated towards smaller projects and individual plotted developments rather than large projects that would take a longer time to complete.

Preference for developers of repute: There was also a noticeable preference for builders and developers of repute and a good track record with regard to project development, pushing aside developers with a questionable reputation.

According to ICRA, this led to increased market share for the top nine listed realty players, from 6 percent of sales in FY2017 to over 16 percent in FY2021.

The long-term trend of consolidation in the market, which has been the result of evolving consumer preferences as well as a sustained increase in the market share of large developers among recent launches, is likely to continue and will support further improvement in the market share of larger and stronger developers, the ICRA analysis said.

Top listed and non-listed developers with good corporate governance practices, financial accountability, trust, and a brand name witnessed very good sales. There is a clear trend emerging wherein homebuyers are willing to pay a reasonable premium for the products being offered by reputed players, according to an analysis by Anarock.

Also Read: Listed real estate firms continue to do well, post 25% YoY sales growth in Q1FY22: Kotak Institutional analysis

Larger houses are in demand: In the past two years, demand has skewed towards homes large enough to accommodate the work-from-home and e-schooling realities, and the average sizes of new unit launches have risen by 26 percent. Along with apartments, a huge demand for plotted developments and villas led many developers to increase their focus on the non-apartment segment, said an analysis by Anarock.

The luxury and ultra-luxury segment fared well as the net worth of the target group for luxury offerings was not severely impacted by the pandemic. These buyers proactively closed deals to take advantage of the market conditions (subdued demand, stamp duty reduction, developer discounts).

Villas, farmhouses and second homes were in demand as buyers looked to purchase properties that offered superior social distancing and lower infection risk in less populated, greener environs. Also, with WFH being the new normal, people could work from anywhere.

Peripheries witnessed increased traction with more than 60 percent of launches in the suburbs.

 Rally of Real Estate Stocks: 2021 witnessed a bull run not only in real estate stocks but also in the broader market. Overall, real estate stocks boomed in 2021 as developers garnered good sales and were actively launching new projects. After the 1st wave, the real estate sector’s recovery was pronounced and improved even further after the second wave as the sector imbibed new learnings to overcome challenges.

 Mid-segment housing outperformed affordable housing in 2021: With WFH and online schooling the new normal, there was huge demand for larger houses, and as a result, the mid-segment (units priced between Rs 40-80 lakh) and high-end segment (units priced between Rs 80 lakh–1.5 crore) did well. Altogether, around 65 percent of the supply between January and September 2021 came in from these segments.

As per ANAROCK’s latest consumer sentiment survey, there was a clear rise in the preference for properties priced over Rs 90 lakh. During the first wave, 27 percent of the respondents preferred properties priced over Rs 90 lakh, which increased to 38 percent during the second wave.

The luxury segment, which is value-driven and not a volume game, also did well this year as homebuyers looked to close deals at lucrative valuations.

The affordable housing segment, on the other hand, slowed down in 2021 due to significant supply addition (around 1.7 lakh units) from 2019 till Q3 2021 (1/3rd of overall new launches). As a result, developers throttled back affordable housing supply to take stock of the situation and focus on execution rather than adding new projects.

“An affordable housing development is a long gestation, low margin-high volume business,  and in the current market conditions, developers are looking at a quick execution and exit,” explains Puri.

Is the worst behind us?

According to data by Anarock Research, the overall performance of the Indian residential real estate market in 2021 shows a definite upswing. Between January and September 2021, 1.63 lakh units of new residential supply were added across the top 7 Indian cities — 27 percent higher than the full 2020 supply — and 1.45 lakh units were sold — 5 percent higher than in the whole of 2020.

While this depicts a cumulative trend, the Indian residential real estate sector’s comeback after the second wave in Q2 2021 was a phenomenal, V-shaped one, the analysis said.

According to experts, while the housing market may inch towards 2019 levels in terms of sales in 2021, the benchmarks to be achieved include those of the first three quarters before demonetisation in 2016 and the average quarterly rate of sales in 2019 before the pandemic.

According to data shared by JLL, quarterly average sales, which were at 25,859 units till Q3 in 2021, will increase in the last quarter of 2021 because of robust sales, and the quarterly run rate of sales will be significantly more than 2020 but below the 2019 quarterly sales rate.

In 2022, if the economic environment remains in line with the current predictions, the quarterly sales rate will reach 2019 levels and eventually reach the average quarterly sales achieved in the three quarters of 2016 before demonetisation. According to the data, the average quarterly launches for the first three quarters before demonetisation stood at 35,189 units and sales were at 39,891 units. In 2019, launches stood at 34,250 and sales at 35,926 units.

Impact on prices 

Unlike in the past, prices in 2021 remained more or less stagnant.

Going forward, too, prices will not increase as most developers are looking at volumes to come back. Even with regard to new launches, developers will adopt restrictive strategy-based launches, said experts.

However, there are some developers who say that prices may increase slightly owing to the rise in the cost of commodities.

“We expect housing demand to continue. However, the rising cost of commodities may get transferred to the end buyers, leading to a 5-7 percent hike in prices,” said Yuvraj S Rajan, Director at Raiaskaran.

Impact of Omicron on the property market

Experts say that while it is too early to predict what the implications of the yet-evolving variant could be, the impact on the real estate sector will depend on the severity of the situation and whether a blanket lockdown is eventually imposed or a calibrated one.

Some experts are of the opinion that Omicron could lead to a continuation of the housing trends that played out during the first two waves of the pandemic. It may lead to some people returning to work-from-home mode as companies may push back plans for a return to office. Besides, the popularity of the peripheral markets may continue for some time. Homebuyers may also decide to wait out the third wave before taking a decision to buy a house.

According to Anuj Puri of Anarock, the arrival of the Omicron strain towards the end of 2021 has slowed this movement to some extent. However, mid-to-long-term prospects remain highly positive as Covid-19 has been reined in to a large extent in India, and most businesses are back on track.

Outlook for the real estate sector in 2022

In 2022, Grade A and organised developers will continue to dominate and capture more market share from smaller and unorganised players. The mid-end and high-end housing segments will continue to drive a majority of the demand.

PE investments in the residential segment to rise further: The residential segment’s share of PE investments had already increased to 22 percent during H1 FY22, from 14 percent during the same period last year, says an analysis by Anarock.

Sanjay Dutt, MD & CEO, Tata Realty & Infrastructure Limited, is of the opinion that the real estate business will continue to bounce back with the market's pent-up demand, job market uptick, mass rollout of vaccines, and decreased infection rates. These factors have and will play a significant role in increasing the demand for housing in India in 2022.

Niranjan Hiranandani, Vice Chairman-National, NAREDCO and MD, Hiranandani Group, says that while 2021 was all about resilience, 2022 will script new-age trends, growth and dynamics in the real estate sector. He sees 2022 witnessing a string of project launches in the residential and commercial market. An uptick in both buyer and investors confidence will augment home ownership and fast-track home upgradation, while the new normal will evolve around ‘the bigger the better’ mindset, Hiranandani said.

Should homebuyers buy now?

In the residential segment, the environment is conducive for homebuyers. The reasons being that the property valuations are at realistic levels, mortgage rates are at the lowest and some developers are offering flexible payment schemes and waiver of GST, stamp duty and other benefits.

Homebuyers should consider projects that are nearing completion, conduct due diligence checks and the track record of the developer, figure out their finances, loan eligibility and job stability before buying property, advises Shalin Raina, MD, Residential Services, Cushman & Wakefield, India.

Challenges ahead - Affordability

There will continue to be underlying challenges in the near future.

There is still a degree of uncertainty regarding subsequent waves of the pandemic, as seen in the rest of the world. As a result, businesses and investors remain cautious on making big financial commitments, say experts.

Another important challenge is a complete or partial loss of income at the household level. With the depletion in income and a compulsion to live off reserves, the ability to make large investments such as buying homes erodes for a substantial length of time. Under such circumstances people’s ability to take a risk is reduced significantly, the experts add.
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Vandana Ramnani
first published: Dec 27, 2021 02:30 pm
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