Although the Indian real estate sector has had reason to cheer in the last six months as pent-up demand has boosted sales, even if developers are able to liquidate unsold inventory — as they have been doing in the past few months — a recovery in prices could still take two years, according to brokerage UBS.
“If all the stars align — ie, inventory depletion continues the same way as it has in the past — we believe we are at least two years away from a recovery in property cycle (in terms of prices), although recovery in Hyderabad and Pune may come sooner. If depletion does not continue as we assume it will, we could be in for a longer stay at the bottom of the cycle,” the brokerage said in a report.
UBS said a revival in struggling projects increases customer choice, which would keep prices in check and impact the property cycle recovery.
“Stamp duty cuts, builders’ deals/ discounts and old sales registrations have resulted in a significant increase in property registrations across Maharashtra and Madhya Pradesh. However, this did not occur in other states. Moreover, the recovery in primary property sales was not as strong or as widespread. Data shows struggling projects sold more in the last quarter than the previous seven quarters. Data on active projects/ developers also indicates increased competition,” it said.
However, the brokerage said the outlook for people buying properties is the best in the last 15 years and the domestic market could clock a CAGR of 7-10% in terms of property volumes over the next two years.
UBS clarified that a normalisation in property prices should not be equated with price recovery. “Assuming inventory depletion continues to the tune of 35,000 units a year (as per the last three years), we estimate a property cycle recovery by the end of 2022E as adjusted inventory-to-sales should by then have reduced to 1.6x,” it said.
Property pricing cycle recovery in Pune and Navi Mumbai should be faster than India’s top-seven cities in terms of housing revenue, followed by Bangalore, Thane, Mumbai, Chennai and lastly Delhi NCR, it said.
With respect to customer consolidation, the brokerage said it is at risk as sales from struggling projects increased in the last quarter and many stressed projects were revived. Besides, builder consolidation has also not been widespread and is stagnating.
“Data shows that across locations, struggling projects have sold the most in last quarter, reversing a seven-quarter trend. Our analysis of active projects and active developers also corroborates our point that struggling projects/ developers have also sold. Moreover, the allowing of recent restructuring at a project level has led to a revival of many stressed projects,” it said.
UBS pointed out that builders’ profit is very sensitive to property prices, which implies a tough time for developers in the current pricing environment, especially with the present cost pressures. It said that builders would have to sell 1.5-2x units to just make a similar profit as before, given the impact on margins.