Indian Real Estate Sector in 2013 & Forecast for 2014
How India’s realty sector performed this year and what to expect in 2014?
By Shishir Baijal, Chairman and Managing Director, Knight Frank India
Overview 2013
It’s that time of the year when I look back at the months gone by and analyze events which may have leveraged the prospects of the Indian economy and the progress seems manifold in almost all sectors. Real Estate and Infrastructure too, is an area that has witnessed unprecedented growth in the last two decades. However, with growth comes the slack, and with the economies facing a slump in the past few years, no sector has been left unscathed.
Monetary tightening resulting from RBI’s measures to control inflation was the major macro influence on the real estate business in India, through most part of the year. High interest rates, spiraling vacancy levels and lower margins arising from inflationary pressures too, led to a slowdown of construction activity leading to a drop in new launches, and also delayed project delivery by several months. Developers with exposure to residential projects are particularly worried, with slowing sales leading to a situation of oversupply in many parts of the country.
City-Wise Classification
My interactions with developers, clients and in-house experts have shaped my understanding of the top six residential markets of the country namely Mumbai, NCR, Bengaluru, Chennai, Hyderabad and Pune.
Mumbai and Chennai, which are land locked from one side by the sea, have the highest weighted average price of Rs 5,900/sq. ft. and Rs 4,700/sq. ft. respectively. Their unique topography has ensured restricted supply of land resulting in high prices for residential properties. While the weighted average price in Mumbai city is much higher at Rs 15,000/sq. ft., it goes down to Rs 5,900/sq. ft. for the entire Mumbai Metropolitan Region which also includes areas such as Thane, Navi Mumbai, Mira-Bhayandar and Vasai-Virar.
Cities such as Bengaluru, Pune and Hyderabad have a relatively lower weighted average price of Rs 3,800/sq. ft., Rs 4,500/sq. ft. and Rs 3,450/sq. ft. respectively. Emergence of the peripheral markets in these cities on the back of large scale development of the IT/ITes sector, has managed to keep prices to more reasonable levels. Bengaluru remains the most affordable residential market with more than 77% of its total under construction units falling below the ticket size of Rs 50 lakh. This is followed by Chennai at 75%.
The deliberate strategy on part of developers in these cities has been to focus on the peripheral areas and offer the right sized apartment which has ensured that the new supply does not breach the affordability level of the target segment.
In contrast, Hyderabad has only 51% of its total under construction units below the Rs 50 lakh price bracket despite the city having the lowest weighted average price among the top six metros. Since majority of the new projects are skewed towards larger sized apartments, the ticket size breaches the Rs 50 lakh mark despite the lower per sq. ft. price.
Mumbai remains the most unaffordable market with 29% of the city’s total under construction units surpassing the Rs 1 crore mark as compared to 11% and 5% for the NCR and Bengaluru markets respectively.
Current Scenario & Future
At 5% GDP growth in FY13, the Indian economy grew at the slowest pace during the last decade. Besides, policy inconsistency and apathy towards the sentiments of the international and domestic business community have aggravated the agony. Hopefully, the policy makers realize that relaxing FDI norms alone will not attract foreign investment. Conducive business environment promoting transparency and policy consistency is a greater prerequisite.
In a bid to achieve the same, the Securities and Exchange Board of India (SEBI) also revived the process of introducing real estate investment trusts (REITS) in the country. However, these regulations couldn’t take shape due to a number of factors, including the global economic slowdown, which also impacted real estate markets. In a welcome move, SEBI once again brought out Draft REITs Regulations, 2013, which were made public on October 10, this year for inviting stakeholders’ views.
The underlying reason for all these moves is that the Indian real estate story continues to be tremendously attractive. While, there is a sort of saturation in the Tier 1 cities, the good news is that Tier II cities have started growing with the IT and industrial sectors investing in such places. Thus, Indian real estate is poised for a boom, taking the rest of the economy with it. The notion that Indian real estate is expensive is based more on the cost of undeveloped land, which is becoming a scarce commodity, than finished residential or office space, which is still available at reasonable prices in most places.
The momentum remains positive, if we can get the investment story right, lower the fiscal deficit and have more progressive monetary policies being drafted by the RBI, there’s nothing which can refrain us from coming back on the growth track by the second half of 2014.
By Shishir Baijal, Chairman and Managing Director, Knight Frank India
Overview 2013
It’s that time of the year when I look back at the months gone by and analyze events which may have leveraged the prospects of the Indian economy and the progress seems manifold in almost all sectors. Real Estate and Infrastructure too, is an area that has witnessed unprecedented growth in the last two decades. However, with growth comes the slack, and with the economies facing a slump in the past few years, no sector has been left unscathed.
Monetary tightening resulting from RBI’s measures to control inflation was the major macro influence on the real estate business in India, through most part of the year. High interest rates, spiraling vacancy levels and lower margins arising from inflationary pressures too, led to a slowdown of construction activity leading to a drop in new launches, and also delayed project delivery by several months. Developers with exposure to residential projects are particularly worried, with slowing sales leading to a situation of oversupply in many parts of the country.
City-Wise Classification
My interactions with developers, clients and in-house experts have shaped my understanding of the top six residential markets of the country namely Mumbai, NCR, Bengaluru, Chennai, Hyderabad and Pune. Mumbai and Chennai, which are land locked from one side by the sea, have the highest weighted average price of Rs 5,900/sq. ft. and Rs 4,700/sq. ft. respectively. Their unique topography has ensured restricted supply of land resulting in high prices for residential properties. While the weighted average price in Mumbai city is much higher at Rs 15,000/sq. ft., it goes down to Rs 5,900/sq. ft. for the entire Mumbai Metropolitan Region which also includes areas such as Thane, Navi Mumbai, Mira-Bhayandar and Vasai-Virar.
Cities such as Bengaluru, Pune and Hyderabad have a relatively lower weighted average price of Rs 3,800/sq. ft., Rs 4,500/sq. ft. and Rs 3,450/sq. ft. respectively. Emergence of the peripheral markets in these cities on the back of large scale development of the IT/ITes sector, has managed to keep prices to more reasonable levels. Bengaluru remains the most affordable residential market with more than 77% of its total under construction units falling below the ticket size of Rs 50 lakh. This is followed by Chennai at 75%.
The deliberate strategy on part of developers in these cities has been to focus on the peripheral areas and offer the right sized apartment which has ensured that the new supply does not breach the affordability level of the target segment.
In contrast, Hyderabad has only 51% of its total under construction units below the Rs 50 lakh price bracket despite the city having the lowest weighted average price among the top six metros. Since majority of the new projects are skewed towards larger sized apartments, the ticket size breaches the Rs 50 lakh mark despite the lower per sq. ft. price.
Mumbai remains the most unaffordable market with 29% of the city’s total under construction units surpassing the Rs 1 crore mark as compared to 11% and 5% for the NCR and Bengaluru markets respectively.
Current Scenario & Future
At 5% GDP growth in FY13, the Indian economy grew at the slowest pace during the last decade. Besides, policy inconsistency and apathy towards the sentiments of the international and domestic business community have aggravated the agony. Hopefully, the policy makers realize that relaxing FDI norms alone will not attract foreign investment. Conducive business environment promoting transparency and policy consistency is a greater prerequisite.
In a bid to achieve the same, the Securities and Exchange Board of India (SEBI) also revived the process of introducing real estate investment trusts (REITS) in the country. However, these regulations couldn’t take shape due to a number of factors, including the global economic slowdown, which also impacted real estate markets. In a welcome move, SEBI once again brought out Draft REITs Regulations, 2013, which were made public on October 10, this year for inviting stakeholders’ views.
The underlying reason for all these moves is that the Indian real estate story continues to be tremendously attractive. While, there is a sort of saturation in the Tier 1 cities, the good news is that Tier II cities have started growing with the IT and industrial sectors investing in such places. Thus, Indian real estate is poised for a boom, taking the rest of the economy with it. The notion that Indian real estate is expensive is based more on the cost of undeveloped land, which is becoming a scarce commodity, than finished residential or office space, which is still available at reasonable prices in most places.
The momentum remains positive, if we can get the investment story right, lower the fiscal deficit and have more progressive monetary policies being drafted by the RBI, there’s nothing which can refrain us from coming back on the growth track by the second half of 2014.