The second wave of COVID did impact real estate demand a little, however, all the listed companies in their commentary indicated that demand in the residential segment is robust and they expect it to continue. But what has really led to this uptick in demand? First, is the work from home culture, the need for bigger, well-equipped houses. Second, the salary hikes seen by IT companies and also the higher attrition and talent crunch, which has led to better salaries and therefore higher purchasing power.
The recent Knight Frank report highlighted how on a year-on-year (YoY) basis, there is a sharp increase in sales and launches in ---H1CY21, of course, also led by a low base. The biggest positive is that unsold inventory has gone down by 1 percent, this has been the biggest pain point for real estate companies. However, on the flipside, demand in the commercial segment was impacted due to the pandemic and work from home requirements. Pavitra Shankar, executive director at Brigade Enterprises, and Abhinav Sinha, vice president at Jefferies India, spoke to CNBC-TV18.
On demand, Sinha said, “So we think the demand that we have seen so far is clearly, the beginning of what could be a fairly long real estate cycle, particularly on the residential front. The volumes, we have to see in various contexts, so one quarter, YoY will look very good, it looks very bad versus fourth quarter for example. But what we are seeing here is that versus what the volumes were in the 2010-12 peak, we are still significantly down and it depends on the market, but my guess would be on an India-wide basis, we would still be down, say 15 or 20 percent. So there is clearly some distance to cover there.”
He further said, “Secondly, we have not even scratched, let us say the surface of what should be the inherent demand growth. There are forces of urbanisation happening, the population is rising, and that is not really reflected if you see the numbers for the last 10 years. So, there is a lot of room to go there.”
Shankar said, “I do believe that we are at the beginning of a bull cycle in the real estate sector, I think we are actually due for one. The sector has had a pretty tough time over the last five years due to various changes in regulations, GST, demonetisation, liquidity crisis, all of that, and from the demand side, we have actually not seen a great pickup across the board. But due to all of the tough times that we have had, there has been significant consolidation in the sector.”
“I think you can actually see improvement happening across some of the largest players, whether listed or unlisted. Given that many people may have held off their home buying purchases, they may feel that this is the right time for them to buy a home. Given so many different factors, affordability is much better due to low-interest rates, many of the home buyers are driven by the IT sector and they have not really seen a change in their salary except on the positive side, potentially, and business to IT companies has actually been extremely good over the course of the last year and as a result of most companies trying to digitise, so, I think that is a great potential for the sector over the next five years, at least we have visibility for about four to five years. Real estate typically has a 10-year cycle so we have come off of some very low points in the cycle and I think this is the time for it to go up,” she said.
On overall price increase, she said, “It is tough to say that there will be an overall price increase. I think, wherever possible, there are some developers who are able to charge a slightly higher price for their products, I think that is natural, given what we have seen in the sector. Customer today wants to be able to put their money in a safe place where they know that the product will get delivered on time with good quality. So there has to be differentiation among those who are putting out the product.”
She further added, “Also, all of the developers are sort of facing an increase in input costs with respect to construction costs, raw materials. There’s also been so many additional costs due to just doing things according to COVID protocol and so on. Also, we have been dealing with the impact of the lost input tax credit, which automatically adds an 18 percent cost on all our construction inputs and services. So as a result, in order to ensure that we are able to put the product there, I think there will be a push to drive up prices.”
Watch the video for the in-depth analysis