India’s real estate sector, specifically the residential segment, has shown quick recovery from the pandemic-induced crisis. A number of factors like low interest rates, fall in prices of residential units and stimulus by State governments have supported the housing market revival in 2021.

The key question now is whether the housing market bounce-back will sustain in 2022. It is critical to assess if, after almost a decade of slowdown, the real estate cycle has indeed turned.

While initially, the pandemic posed a severe setback for the real estate sector, the quick bounce-back took everyone by surprise. In fact, the pandemic turned into a strong factor supporting housing demand, and this not just in India but the world over. The surge in housing demand was also supported by low interest rates everywhere.

During the pandemic, people felt the need for bigger and better houses. As a result, in spite of uncertain times, households chose to channel their savings to create a real estate asset. Globally, the housing boom has been accompanied by a sharp rise in housing prices, resulting in fears of a housing bubble emerging.

In India, however, the housing sales surge has not been accompanied by rising prices so far. After having fallen in the last few years, housing prices have stabilised in the last few months.

Deleveraging exercise

In many countries, especially China, the housing sector is highly leveraged. The recent defaults by Chinese real estate behemoths like Evergrande and Kaisa are cases in point. In India, on the contrary, there has been a clean-up of balance sheets of the real estate players in the past few years, with many of them deleveraging.

For the top 10 real estate developers, the debt-equity ratio has fallen from 1.40 in 2016 to 1.17 in 2021. The slowdown in the sector in the last few years has resulted in only players with better financial health surviving.

Structural reforms like RERA and GST in recent years have led to consolidation and formalisation of the sector.

Funding, however, continues to be challenge, especially for smaller players in the sector. Banks have become cautious during the pandemic, resulting in outstanding bank credit to the commercial real estate sector falling by 0.3 per cent in the current year compared to the previous.

In FY20, bank credit to the commercial real estate sector grew by a healthy 29 per cent before petering down in the subsequent months.

The other critical issue facing the sector is the large unsold inventory. While it fell from a peak of 7 lakh units (for Top 8 cities) in 2014, unsold inventory still remains high at around 4.4 lakh units.

The government has set up the SWAMIH fund to help fund stuck projects in the affordable housing segment. While the fund has helped, the process involved is time-consuming and comes with its own set of challenges.

Now, will housing prices and interest rates start rising next year, and will that curtail the growth momentum?

With raw material prices, land and labour costs increasing, housing prices are expected to go up. The strong demand will enable developers to pass on the increase in construction cost. However, the price increase is likely to be gradual and not sharp as being witnessed in many of the other countries.

End-user driven

The housing sales boom in India has so far been led by end-user demand, hence the price rise is likely to be incremental. Speculators and investors aren’t active in the realty market now as this asset class has delivered poor returns in the last few years.

As far as interest rate is concerned, it is expected to start inching up given the inflationary concerns. But the interest rate hike is likely to be gradual given the growth uncertainties of the economy. Hence, a gradual increase in prices and interest rates in the next few months may not affect the housing growth momentum.

A fairly critical aspect in this turnaround story will be household income, which in turn will depend not just on overall economic growth but also on the quality of growth.

While India’s economy is projected to grow by around 8 per cent in FY23, there could be lot of hiccups with further waves of Covid remaining a concern.

A strong hiring trend has been seen in India’s IT sector and that should support household income. The unorganised sector and the MSME segment, on the other hand, have been hit hard by the pandemic and need to bounce back.

A large part of India’s housing story is led by affordable housing and for this category to do well, it is critical for the income at the bottom of the pyramid to grow.

The writer is Chief Economist and Head of Research at Knight Frank India

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