Real estate in India on a K-shaped recovery, says CREDAI president

The real estate industry went through multiple challenges over the pandemic years with supply chain disruption, labour crisis, and budget crunch slowing down growth. Construction rates have shot up and the market has also witnessed the pressure of inflation. However, the realtors claim that things are on the mend as most builders have found a way to be back on their feet by now. The market is in fact showing a K-shaped recovery, claims the president of Confederation of Real Estate Developers Association of India (CREDAI), Harsh Vardhan Patodia, in an interview with Business Today. Edited excerpts.

BT: The real estate industry has been going through massive changes over the past few years. The pandemic fears have ebbed and now new challenges have emerged. Your take on this.

HVP: The realty industry, like all other industries, was severely impacted by the pandemic. The momentum of India's real estate business was thrown into disarray by a disrupted supply chain, halted construction, labour scarcity, and low budget spending in the industry. Constructors have experienced delays in buying and selling projects because of COVID-19. Yet, the Indian economy has displayed resilience in the last one and half years, having grappled with numerous highs and lows, and on a path of a K-shaped recovery driven by timely interventions by the Government.

The real estate Industry as well despite facing multiple challenges in the past five years continues to be the preferred investment option for Indians. With the ongoing rising inflation, effects of the Russia Ukraine crisis, and rise in interest rates, the realty sector has yet again felt the pressure affecting construction and procurement and disruption in demand for new projects.

Recent interventions by the Government of India with measures to reduce import duties on steel products, iron ore, and steel intermediaries, will provide a breakthrough for bolstering the availability of raw materials domestically, cool off the prices of steel products, and help tide the rise in prices of projects, strengthening consumer sentiment.

BT: What is your estimate of the total unsold inventory in India at the moment? What is the demand-supply gap?

HVP: As activity in housing supply picked up the pace, housing inventory swelled slightly, at an annual rate of 4 per cent . The fall in inventory overhang came on the backdrop of the residential property market witnessing sales rebound in 2021, to more than 90 per cent of the pre-pandemic 2019 levels.  In 2021, the top 7 cities recorded sales of around 2.36 lakh units. Housing sales in the 4th quarter (October-December) broke all records of the last 28 quarters and broke the 90,000 unit’s mark. Factors like positive homebuyer sentiment, all-time low home loan rates, and anticipation of imminent price hikes helped housing sales touch a new high, bringing down overall residential inventory overhang across the top cities. As demand improved in the industry, unsold inventory constantly dropped starting Q2 2020 till Q4 2021, led by low loan rates and largely stable prices. However, an increase in launches and the third wave of Covid-19 in Q1 2022, led to an uptick in the unsold inventory. Hence, after dropping for 7 consecutive quarters, unsold inventory rose 1 per cent, QoQ. MMR accounts for the highest share of unsold inventory, followed by Delhi NCR and Pune. Pan India, the unsold units in Q1 2022 is around 9,00,000 due to various factors affecting the demand.

BT: What is currently the requirement for affordable housing in India? The price-range for affordable varies as well.  Can you explain? 

HVP: Given the price escalations, the affordable housing segment was the most affected, impacting residential sales and demand. Affordable housing projects (and those priced below Rs 75 lakh) are said to have hit the slow lane in India as developers held back launches because of the rising construction costs when the delay in the completion of the existing projects was not ruled out either. The impact of the increase in cost per sq ft is around Rs 500-800 for the realtors who play on volumes with low margins, resulting in a 43 per cent sales dip in the segment.

In metropolitan cities like Delhi NCR, Mumbai, Kolkata, Bengaluru, Chennai Hyderabad, etc. if the price of the housing unit is Rs 45 lakh or below and the carpet area of the unit is 60 sq mt or below, then the housing unit will qualify as an affordable house in any of the metropolitan cities.

The central government's Rs 48,000 crore outlay to augment the supply in the affordable housing segment in both rural and urban areas is a welcome step which that will accelerate the vision of ‘housing for all’. CREDAI also appreciates the move of the government of India in providing the relief in the construction cost, however, apart from boosting the supply, there is also a need to boost the demand in the segment through tax rebates, stamp duty waivers, and by increasing the capping for homes to qualify as affordable homes in metro cities to further incentivise homebuyers. CREDAI is in touch with the constantly in touch with the concerned authorities to provide the needed support to the segment. Though, the limit revision for urban co-operative banks after a hiatus of 11 years in Tier 1 cities to Rs 60 lakh (previously Rs 30 lakh) and for Tier 2 cities to Rs 1.4 crore (previously Rs 70 lakh) and for UCBs the limit has been increased from Rs 20 lakh to 50 lakh for a net worth of Rs 100 crore and from Rs 30 lakh to Rs 75 lakh for other RCBs, will ensure a positive impact to help homebuyers realise their dreams of owning a home, especially in the affordable segment in line with the Prime Minister’s vision.

BT: Over last year, cost of construction has gone up. Will it impact pricing of new launches? 

HVP: The rising cost of construction is likely to push up real estate prices across real estate assets classes, dampening the recovery. Over the last year, developers’ average cost of construction has risen 10-12 per cent, owing to higher input costs due to supply-side constraints. This surge in cost comes at a time when developers have been under pressure due to higher debt and liquidity concerns over the last few years. The geopolitical tension between Russia-Ukraine has disrupted the global supply chain, thereby pushing up prices of crude oil and other commodities, leading to a rise in global inflation in many countries, forcing them to raise domestic interest rates. The impact of the ongoing Ukraine-Russia war is being felt in India too. The Indian realty market is feeling the pressure of escalating prices and disruptions in supply chains amidst the general volatility in international markets. There has been a steady increase in the prices of construction raw materials in the last two years. The prices further aggravated due to the ongoing Ukraine Russia war. The oil prices in the international markets are at an all-time high including the Indian market and this has further added to the escalation of the price, thereby impacting the new launches.

Home prices increased by 5 per cent year over year until December 2021, and continued to do so in January–February 2022. Some micro-markets even reported a 10 per cent increase, however, this was due to project-specific variables.  Rise in input costs was the catalyst for this increase. Developers were able to pass it on without seeing a significant drop in demand. The geopolitical tensions in Europe have had an impact on building material prices here. April onwards, construction costs increased by 10–15 per cent; cement costs have risen by more than Rs 100 a bag, while steel prices have nearly doubled from Rs 45,000 a tonne last year to Rs 85,000. Now, the Indian government is seeking to assist the business by keeping the economy stagnant, which will benefit the industry in the long run; but, until then, the pricing of new launches may be affected by the aforementioned concerns.

5) If one were to locate the emerging real estate hubs for residential property in India, which would be the key areas in NCR, MMR and South? 

HVP: After momentous growth over the last seven consecutive quarters as increased prices of residential properties were supported by robust demand by homebuyers, all 8 metros (Delhi-NCR, MMR, Pune, Chennai, Ahmedabad, Bengaluru, Hyderabad, and Kolkata) have seen a YoY increase in prices, highlighting the surge in understanding the importance of owning a home and the spending capacity of the buyers in the market.  As suggested by data available, with housing prices remaining stable in the Bengaluru market and the Karnataka government announcing a reduction of 10 per cent in property guidance value, the focus would shift to the peripheral regions and Inner east region of the market which have seen a decline in prices in Q1 2022. However, with a substantial decline in prices (after witnessing marginal increases for 8 consecutive quarters) in Chennai’s Central, Coastal and North regions, demand is expected to pick up. Additionally, even the outer remote areas in the city have witnessed an increase in prices, highlighting the high demand for larger spaces to support the increasing WFH culture.

Delhi-NCR saw the steepest rise in prices during Q1 2022 (11.3 per cent) and despite the trend, it was supported by increased demand as the sector recovered after the bruising impact of the pandemic. Regions such as Golf Course Road, Golf Course Road extension/ Sohna Road, Faridabad, Ghaziabad, and Noida have seen a decline in their prices indicating the future of the market.

MMR recently witnessed one of the best months in May registering 9,630 property deals and benefitting the exchequer with Rs 714 crore (a jump of 166 per cent), the highest ever for May. The Central Suburbs have seen a 2.1X growth in the value of units sold by March 22, whereas Eastern & Western suburbs also witnessed growth. Thane city wasn’t left behind as it registered a 1.5x growth in the value of units sold by March ‘22, and Navi Mumbai saw a 1.7x growth too.   

BT: Over the pandemic period, many people have upgraded their residences – how has it pushed the luxury market? 

HVP: Over the course of the last two pandemic-ridden years, the focus of homebuyers has shifted to owning a home than renting. This trend has resulted in the emergence of buyers from various age groups, especially millennials who continuously focus on projects which provide state-of-the-art amenities and modern facilities. However, with a sharp focus on luxury properties in 2022, the uber-rich and HNIs have continued to lay their eyes on high-value properties in prime locations largely either owned by the elderly or multiple members of the next generation which have resulted in the rise in sale of secondary luxury properties.

BT: Is there a future for green buildings in India?  

HVP: It is important to understand the results of adapting adopting sustainable measures for a long-term effect on the industry and to mitigate any negative impact. Currently, the real estate industry is in the process of transforming itself into a more responsible asset class given its substantial contribution to the GDP of the country. While India is still at a nascent stage to realise its net-zero target by 2070, for it to progress the burden can’t be borne by developers or investors alone. According to the data available, the majority of investors expect more support from landlords and city governments to make significant progress. Hence, the action has to begin at the grassroot level. While Mumbai is one of the few top tier cities to implement a comprehensive Climate Action Plan (MCAP), which would entail a strategy to increase the green cover by all new developments on plots over 2000 sq m to mandatorily include rooftop gardens and promote biodiversity conservation. Additionally, clean energy will be a fundamental pillar to achieve achieving the targets set out, thus procuring renewable sources of energy would be an integral part of the equation. Installation of solar panels, which only partially fulfill the total requirement, is another step which that can be taken to achieve this goal. Moreover, home buyers now are willing to pay a premium for a sustainable future as they realize how climate risks might pose a financial risk too in the future.

BT: What is CREDAI's blueprint for real estate growth in India, what policy support is your body seeking from the government now to be able to drive the sector to its next level of growth? 

HVP: The real estate industry supports close to 250+ ancillary industries in the country and owing to the robust support and timely interventions of the Government of India that the sector is moving towards momentous growth despite grappling with the strains of cost inflation of raw material prices in the last 18 months. While the impact of the government’s measures of reducing the prices of steel and cement will take time to show the effect on the ground, the real estate sector is hopeful that these steps will address some of the issues the sector has been facing. Additionally, CREDAI has been urging the Government to address the issues pertaining to the facility of charging either at the old rate of 8 per cent for affordable housing or 12 per cent for non-affordable housing with Input Tax Credit or the rate of 1 per cent or 5 per cent without Input Tax Credit. The developer may be given the option of choosing the rate project wise.

Also, for the steady growth of the nation, timely delivery of projects aid in improving the quality of residential and commercial activities. However, Environmental Clearance (ECs) has been taking a longer time than expected which negatively impacts the delivery of projects. Another issue is related to project development around airports with height restrictions near airports and permissions for construction near defense sites. These limitations are acting as impediments to the growth of the industry.

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