Demand for residential realty will see a revival in the next three years due to high-end-user participation on rising affordability, increasing launch of units with mid-income ticket sizes and implementation of RERA, a report by Crisil said on Tuesday.

“Between fiscals 2019 and 2021, residential demand is estimated to log a compound annual growth rate of about four per cent, led by key micro markets of Bengaluru, Hyderabad and MMR. Though marginal, the growth will be driven by first time buyers eyeing units in mid-income tickets, typically priced from Rs 25 lakh to Rs 1 crore,” Rahul Prithiani, Director, CRISIL Research, said.

Affordability, calculated as the ratio of the property cost to annual household income, is expected to come closer to the ideal band given a moderate income growth estimated for mid-income households. “As of FY19, affordability in most cities is estimated to be in the range of six to eight times compared with 11-13 times five years back,” it said.

Moreover, ticket sizes have been coming down as developers are launching units with reduced average area per house, led by both market needs and the impetus to affordable housing. “As such, capital values in the residential segment have been under pressure of late – with a decline of five to 20 per cent across micro markets in the last two-three years – and are likely to remain range-bound because of unsold inventory,” it added. Resolution of the recent NBFC liquidity issues, however, would be key for the same.

Commercial segment

Alongside, the commercial portfolio is also seeing steady lease rentals and healthy demand. Even as investor interest in the residential segment has been fading due to limited property price appreciation and inability to monetise the assets, commercial real estate is becoming a hub for new investments.

“With large private equity firms and property managers on the prowl, just 15 of the larger marque deals over the last five fiscals have totalled around Rs 30,000 crore. This has helped cushion the blow for developers who have been refinancing and taking on more debt for construction as residential demand remains tepid,” Crisil said.

NBFC liquidity issues

With limited incremental funding to the sector from banks, which grew at just 2% in fiscal 2018, NBFCs and HFCs came to the developers’ rescue. “However, given the current pressure on liquidity for NBFCs, a potential cascading effect on select projects and developers, could make access to funding more difficult for them,” it added.

Developers with a portfolio of commercial assets have been able to manage their liquidity better and are expected to continue to do so. “Real estate investment trusts, or REITs, could be another way to help developers deleverage, and the success of the first REIT will set the tempo on this option,” Sushmita Majumdar, Director, CRISIL Ratings said.

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