Indian Residential Sector

arvind jain1Residential real estate remains the focal point of Indian real estate, regardless of market conditions. Considering the massive demand for homes in the country, this is hardly surprising. However, demand does not equal absorption in a price-sensitive country like India, where the greatest requirement for residential properties stems from the EWS and middle-income group. The high dependence on home loans by the salaried class underscores the price sensitivity factor even further. 

All said and done, 2013 was not a good year for India’s residential real estate market. The sluggishness was most pronounced in the prime cities. Thanks to resurgence in employment-driven market sentiments and the arrival of a number of right-priced residential projects, Pune proved to be a notable exception. The city showed a very healthy demand for mid-priced residential properties throughout 2013 and on into the first quarter of 2014.

The reasons for the generalized slowdown in most Indian cities are not hard to guess – inflation led to decreased purchasing power and financial confidence, while the RBI went through the ceiling with its spate of hikes in interest rates. This obviously led to a steep rise in the EMIs that home loan borrowers had to bear. Property prices remained high in most cities, largely because developers were hit hard by the vastly increased costs of construction and debt.

At the same time, the potential for most salaried people in the country to switch to more lucrative jobs took a nosedive because of the fallout of the economic crisis in the developed countries. All this combined to bring about a sort of stalemate between developers and property buyers in cities where inventory as well as property rates remained high – most notably Mumbai, Bangalore and Delhi.

Though often made out to be the villains of the piece, there is no escaping the fact that India’s residential real estate developers had their backs against the wall in 2013. Because of the rising input costs and compromised sales, they were prevailed upon to cut back on project launches. In line with the need of the hour, those that did happen were mostly in the mid-income and budget homes segments. Luxury housing took a severe body blow and movement of premium and super-luxury properties in the metros slowed down considerably. Only affordable to mid-range homes continued to sell – often on the basis of unofficial, project-specific discounts.

Through it all, residential developers pinned their hopes on the Diwali festival season, which usually brings with it a 25-30% rise in home purchases a month or so before it actually arrives. In anticipation of the coming demand, they kept their stated prices steady; instead of hard discounts, many smaller developers offered freebies and add-on incentives. Some centrally located projects even showed marginal increases. The ‘freebie’ strategy failed noticeably, with home purchases increasing by no more than 10-12%. By and large, the sales that did happen took place on the basis of discounts wrangled on the negotiation table.

In the early part of 2014, sentiments on the Pan-India residential property market will remain cautious, but cities which offer better affordability and returns on investment will pick up. The ratio of sales over inventory in overpriced cities will remain more or less equally balanced. However, certain suburban pockets in cities like Pune and Chennai that are seeing real-time infrastructure enhancements will show price rises.

Also, because of the high demand for ready-to-move-in residential properties in all major cities, there will be price increases to be seen in projects that are being delivered or are close to completion. The mid-end and affordable housing segments will record healthy appreciation in capital values in the short term from a low base. The provisions made for this segment in the recent interim budget to help the affordable housing sector have paved the way for increased activity in 2014