The real estate sector in India is on a low right now, but there is more to go before it hits rock bottom.
For quite a while there has been a lot of chatter about the way forward for the Real Estate sector, which has been facing trying times in the recent past. As most real estate developers are marketing people at heart, a sense of optimism has always been there, about a rebound in the market, every season (between October and January end) every year. It was possibly in 2018 that reality dawned upon realty and it became clear that there was a lot of change that was imminent.
One of the first and most important change is the impending exit of many players of all categories through either sell-out of their projects or Mergers & Acquisitions. Already, in many real estate trade bodies there has been a drop in membership, which could soon pinch the very functioning of these trade bodies. A large number of under-construction developments have stopped across the country. It is expected that, with the funding for stressed assets being offered to companies with good financials, these developments will be bought up through the use of Asset Reconstruction Companies. Also, companies that are in the CIRP of the Indian Bankruptcy Code will find buyers to complete projects. This will see a large pick-up in 2020 and will go on till the churn is complete by about 2025. It is expected that not more than 25-30% of the existing property developers, without partiality to size, will step out or be acquired by stronger companies.
This will lead to the process of developers completing developments and then offering them for sale when the Completion/ Occupation Certificates are in hand. The old process of selling from the time the project is launched will shortly die out; not immediately, but in a decade at the most. Of course, this will lead to price escalation but that is inevitable.
Co-living is the new jargon for chummeries that have been in vogue since the early 1990s. It is now a popular model but it is believed that it is fraught with risk. The reason behind the bullishness of this model is the belief that millennials are not inclined to buy apartments and take on long loans. However, should home loan interest rates drop to around 7%, which is what most people in the HFCs talk in private, it is very possible that this trend will change as affordability may be an important motivation for purchase.
The state of the economy, irrespective of which side anyone is on, is a cause for worry. As long as that is not improved in real terms, not just numbers, the so-called ‘affordable housing’ will not take off. What is affordable housing other than a house squeezed in size and specifications sold at the market price per square foot or a development which is so far out of town that the cost of commute will wipe out the savings? If, however, the Government was to bestow “Industry “ status on the real estate sector (a crying need for over the last decade and a half), then there is a possibility that the lower rates of borrowing plus the lower corporate tax rates will see prices drop in more central areas and make apartments more affordable.
It is very important that the sector innovates in a manner that can cut the existing costs. Prefabricated construction is in its nascent stage, but is bound to increase and hence lower costs, from today’s levels. This is going to be a very important part of the construction-related change that is expected in India.
To conclude, contrary to popular belief, it is very possible that high-end apartments and villas will see traction in the coming years. This is mainly because of low stocks as almost all new developments are focusing on the more affordable segment.
The sector is on a low right now, but there is more to go before it hits rock bottom. That should happen by the middle or end of 2020 and the revival will be in place, in a small way, by next season – the year 2020.
(By Koshy Varghese, Managing Director, Value Designbuild Pvt Ltd)