Early signs of realty revival: 6% rise in sales; price-to-income multiples drop

A lot has changed for Indias real estate in recent times. In many respects, these changes are connected to the global landscape, while in some other ways, they have been our own making.

The boom in sales, the unstoppable upswing of prices and ever-increasing investor interest received progressive jolts in the years following 2010. The deceleration between then and 2017 was not a whisper; it was in-your-face!

It became an established fact that the residential market was bleeding profusely with each passing year. As if dragged down by an ever-increasing g-force, it was one grim year after another on the sales front. The nadir could not have been very far…

The graph here tells us the story.

One can identify a clutch of reasons. First and foremost, markets started factoring in a reasonable degrees of risk-weight for the financial situation of developers. Second, the recognition of the fact that despite skyrocketing prices, end-users remained neatly removed from the play. In fact, as our Knight Frank Affordability Index demonstrates, average home price in Mumbai peaked at an astronomical 11 times the average income, making it an impossible market for the end-user. Finally, the enablers of the ecosystem themselves entered a painful, but unavoidable, cycle of metamorphosis: The implementation of Benami Transactions (Prohibition) Amendment Act, 2016, Real Estate Regulatory Act 2016, demonetisation (in late 2016), etc., joined other forces to complete the circle of misery.

Having witnessed this reversal of cycle from ever-rising sales that crossed 368,000 units in 2011 to below 245,000 in 2016 (a 34 per cent drop), the market began an introspection of sorts somewhere in 2017-18. The realisation began to dawn that money was not where the mouth was!

Two alibis to prove this realisation: pricing alignments and product alignments. From a high of 11 multiple (price to income) in Mumbai, our aforementioned index recorded a 7.2 multiple at the end of 2018 – a correction of nearly 400 basis points. While it can be argued that this is still not what it should be, it is nonetheless a substantial watering down.

This was achieved by a notable shift in product-orientation itself. From catering mostly to luxury and premium segments, developers have shifted to creating stocks in the affordable category.

Our Real Estate H2 2018 Update showed that 60% of the apartment stock is now developed in the sub-Rs 50 lakh bracket. This has had a definite positive impact. As a result of these measures, among other things, the market recorded an improvement in sales for the first time in seven years over the previous year: sales grew 6 per cent in 2018 over the 2017 numbers.

While one can argue that a 6% growth is nothing to boast of, two things make it special:

1. This rise in sales is unmistakably halting a downward trend, if not exactly a revival. Whether sustainable growth or otherwise, it has provided some vital clues to the beleaguered industry.

2. It must not be forgotten that 2018 witnessed yet another anti-climax: the liquidity crisis in the NBFC sector. This unfortunate event nearly stifled the real estate industry in the last quarter of Calendar 2018. The jury is still out on how the industry performance would have been but for this. Some experts believe that had it been otherwise, the rise in sales could have been far better than 6 per cent.

Still, to end the year with a revival, albeit a miniscule one, is sRead More – Source

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