Stating that it is still too early to say that there is a revival in the buying sentiment in the housing market, a rating agency has said that correction in residential real estate prices by up to 5 percent over the next 2-3 quarters cannot be ruled out.
A ‘meaningful correction’ would spur sales, which is now long awaited and may provide relief to a few developers, it said.
Affordable and mid-segment housing demand from end-users is expected to drive the residential real estate market going forward and prices are expected to remain in a lowering trajectory over the next three to four quarters as major markets witness inventory clearance, it says.
It notes that the improvement in buying has been limited to few markets; mostly smaller cities followed by the major markets. But it is still early to call it revival in buying sentiment.
Overall development in the housing sector is expected to be led by southern region followed by northern and western region respectively in terms of project completion.
It notes that housing inventory in peripheral markets of major cities seemed to have peaked. The demand for them now remains subdued as fewer buyers would buying properties at escalated prices in far-distant locations.
The overall focus for developers should therefore be on development and redevelopment of properties nearer to city centre with good access to public transport and civic amenities, it says.
It expects further decline in operating margins to 27-30 percent levels as more mid-segment and affordable housing inventory hits the market for sales during the remaining financial year 2019 and 2020. Nonetheless, affordable and mid-segment housing demand from end-user would drive the industry going forward, it said.
As for sales, the rating agency said they have bounced back in financial year 2019 after facing headwinds in the financial year 2018 due to implementation of RERA and GST. Another factor which has been supporting sales in the industry has been steady addition of high-demand affordable housing units across tier-1 and tier-2 /3 cities.
As for the regulatory framework such as RERA, the rating firm is of the opinion that there is a need to push for a more transparent process for obtaining permissions, which has to come from the Government’s end. A time bound, single-window clearance regime is the need of the hour.
“RERA in its current form still leaves lot of scope for improvement and a GST council- like structure would have been a better suited model for its implementation than leaving power with individual states to form their own regulatory authority, rules and appellate tribunals. Even after over 18 months post implementation, 25 percent of the states are yet to notify the general rules. 30 percent of the states are yet to come up with web portals and a registration process,” it says.
NBFC crisis and REITs
It also notes that there is stress level in the NBFC and HFC segment which are major sources of funds for private developers. This is expected to impact the overall funding scenario in the industry but temporarily.
On REITs, it says that a REIT listing is expected to now remain on the back burner. A more favourable REIT listing regime in other and much deeper markets like Singapore and sizable demand for commercial real estate in the secondary markets further makes a case for not getting assets listed in India.
“REIT continued to be a no-show during 2018. At the moment, it seems, the market is not yet ready for the instrument and hence, developers looking forward to list may continue to maintain status quo till post 2019 general elections,” says the rating agency.
Two key factors have kept REIT listing probable’s away was the NBFC crisis followed by volatility in the emerging markets. The impact was more evident on construction related sectors.
Commercial real estate
Total leasable commercial real estate is approximately 550-575 million sq. ft (msf) and the same is expected to touch 600 msf by the end of 2019 as more projects near completion especially in Bengaluru, Hyderabad, Mumbai Region and Kolkata markets. Thane, Bengaluru, Kolkata, Hyderabad and Amaravati would continue to add more commercial office space going forward, says the rating agency.
Most companies with leasing business reported double digit growth during H1FY19 over H1FY18. The growth in lease has been a mix of further addition of leasable space and increase in rents. The segment also witnessed healthy buying and selling activity, especially from foreign institutions.
The total co-working space inventory across the major cities is nearly 7 msf and is expected to grow to 15 msf over the next 2 years, says the rating agency.
Co-working spaces have caught the imagination of lessor and tenants alike. As more organisations are focusing on flexible work locations, there is steady increase in the co-working space inventory across metro cities and to an extent in non-metro cities where co-working spaces have doubled up as commercial spaces and start-up/incubation centres.
Bengaluru, Mumbai, Pune, Chennai, Hyderabad and Delhi are among the key markets for co-works’ space. Co-working space may become an answer for non- A grade office spaces to improve realisation and occupancy; and is cost effective for small tenants.