Need to keep the momentum up for residential sector
November 5, 2020 2:13 PM
Developers have to think through possible alternatives and strategies to keep the momentum up than to ride on the current wave.
The current euphoria may slow down by the end of the year as many soaps and incentives will be gradually withdrawn.
The residential sector is among those which witnessed a robust recovery during the unlock phase. The pace of rebound was pleasantly surprising for developers, investors and allied stakeholders of the sector. Most of the major markets did well. Sales in Q3 were up by almost 85% to those of Q2, albeit the base effect came into play. However, this is not to undermine the recovery.
According to digital platforms, search activity for the residential sector has soared back sharply and in fact surpassed even the pre-COVID levels by 30-40 per cent in most markets. Conversions sales witnessed the maximum increase in Kolkata (68%) followed by Ahmedabad by 64%, and MMR and Bengaluru by 60% each. Before the lockdown the unsold inventory in top 8 metros were around million. During the lockdown the new project launches dropped by almost 68%. The higher absorption and lack of new supply brought down the unsold inventory from 109 months to 66 months from Q1 to Q3, which is certainly a sign of robustness of the market. The demand was felt all around.
Contrary to popular belief, even the luxury segment did well between August and October. There are several drivers for this early turnaround. The pent-up demand being one of the major reasons. Some buyers realised that work from home is here to stay and thus prompted them to hasten their purchase. There were other benefits too. The home loan rates are now at a all time low. The top five banks of India are offering home loan rates between 6.9% and 8.5%. This coupled with the interest subsidy under PMAY can bring the effective interest rate below 5%, which is marginally higher than residential rental yield (3%-4%).
In other words, for certain types of properties, the rental amount can pay for the interest part of the loan, which was not possible even a year before. In addition to that some state government provided discounts on stamp duty and registration. In many cases, builders bore the small percentage and made a “Lumpsum” all inclusive offer to the buyers which was received well. The festive season also contributed to the momentum. Many developers reported that even the millennials are back as buyers who were largely missing in recent times. Having said that, there are a few question marks on the performance of the residential sector in Q1 of 2021.
The current euphoria may slow down by the end of the year as many soaps and incentives will be gradually withdrawn. There has been growth in new launches in the Q4 of 2020, which certainly has taken the inventory levels much higher. Most importantly, while the vaccination is still some months away, the winter season carries the risk of a probable second wave of Covid-19 cases. In short, developers have to think through possible alternatives and strategies to keep the momentum up than to ride on the current wave.
(By Subhankar Mitra, Managing Director, Advisory Services at Colliers International India)