The COVID crisis hit us at a time when the Indian economy was already slowing down. The GDP growth of 4.7% recorded in Q3 FY20 is the lowest in the last six years. All the pillars of India’s growth ie consumption, investment and exports were slowing down
The financial sector, which is the backbone of any economy, was already going through a painful phase with banks struggling with high NPAs and NBFCs facing huge credit crunch. The unprecedented disruptions in the economy caused by the pandemic imposed lockdown and a complete shutdown of all activity in the real estate industry ensured that sales plummeted to near inconsequential levels in Q2 2020. The Indian real estate industry has been in the midst of a regulatory revolution aimed at introducing transparency, rationalising taxes and promoting affordable housing. The imposition of the Real Estate (Regulations and Development) Act, 2016 (RERA), Goods and Services Tax Act (GST) and reduction of GST rates to 1% for affordable housing and 5% for others were steps in this direction
• These regulatory changes took place at a time when the residential market was already under a lot of stress with lacklustre sales, stagnating prices, falling investor demand and large unsold inventories across markets. With the RBI having tightened lending norms to the real estate sector and customer advances being prohibited by RERA, NBFCs had become a major source of funding for real estate developers over the course of this decade. However, the NBFC crisis at the end of 2018 left the industry with very few options as investor demand had reduced dramatically in the past few years and the stagnating prices afforded potential homebuyers an opportunity to delay their decision while hunting for better bargains. The setting up of an Alternative Investment Fund (AIF) to provide relief to developers with unfinished projects has also had little impact on improving end-user sentiments significantly in a landscape clouded by the ongoing slowdown in the economy
• While coming to terms with the new regulatory environment and slack demand scenario, developers have been increasingly aligning themselves with the needs of home-buyers by reducing ticket-sizes and unit-sizes in a bid to encourage sales. This period of right-sizing and right-pricing of new residential product and greater transparency due to increased regulation, had prevented homebuyer sentiment from declining further and led to a steadying, if not a increase, in sales numbers, since H1 2018
However, after two years of stagnant albeit steady demand, total sales in the eight markets under our coverage fell by a massive 54% YoY to a decadal low of 59,538 units during H1 2020. New launches also fell the most in H1 2020 compared to any period during this decade at 46%, to 60,489 units
• The COVID crisis hit us at a time when the Indian economy was already slowing down. The GDP growth of 4.7% recorded in Q3 FY20 is the lowest in the last six years. All the pillars of India’s growth ie consumption, investment and exports were slowing down. The financial sector, which is the backbone of any economy, was already going through a painful phase with banks struggling with high NPAs and NBFCs facing huge credit crunch. It is not just Indian economy, globally economies were slowing down with many of the countries in EU and Japan recording contraction in 2019
• The unprecedented disruptions in the economy caused by the pandemic imposed lockdown and a complete shutdown of all activity in the real estate industry ensured that sales plummeted to near inconsequential levels in Q2 2020. Innovative marketing plans such as online presentations of residential projects and aggressive sales strategies like allowing refundable deposits (on booking) and facilitating homebuyer financing by developers, salvaged some sales at the end of the period for top tier developers in an otherwise disastrous quarter for the market. Additionally, sales were limited to old enquiry conversions instead of new customer additions during this pandemic affected period
• The impact of the pandemic induced lockdown on the real estate market can be gauged by the fact that sales and launches have capitulated by 84% and 90% YoY in Q2 2020 across the eight markets under review. NCR, Chennai and Hyderabad had near zero sales during this period while developers were forced to postpone launches across markets due to labour unavailability and the well anticipated drop in demand
• Nearly all eight cities under coverage saw sales and launches fall steeply but NCR was the worst affected market with sales and new launches capitulating 73% and 82% YoY respectively during H1 2020. The 37% YoY growth in units launched in the Kolkata might seem exceptional in the current environment but one must consider that this growth was on an abnormally low base for a market that usually operates on a much larger scale of supply. Sales in traditionally end-user markets like Bengaluru and Hyderabad also fell sharply by 57% and 43% YoY respectively during H1 2020
• NCR’s share of launches and sales nosedived from 7% to 2% and from 15% to 9% YoY respectively during H1 2020 compared to H1 2019. Mumbai continued to lead in terms of share of launches and sales in H1 2020 at 39% and 31% respectively
• Developers have been focusing on launching products in lower ticket sizes where most of the homebuyer demand is concentrated and H1 2020 was no different. 58% of the units launched in H1 2020 were priced under INR 5 mn compared to 51% in H1 2019. However, the sales in the under INR 5 mn ticket size have reduced in H1 2020 to 47%, down from 50% in H1 2019. This can be attributed to income disruptions caused by the economic slowdown and the pandemic imposed lockdown that have adversely impacted homebuyers in the affordable segment
• The current quarters-to-sell (QTS) level stands higher at 10.1 quarters at the end of H1 2020 compared to 9.3 quarters in H1 2019 due to the sharp fall in sales and unyielding unsold inventory levels. The age of unsold inventory too has increased across the eight major cities to 16.4 quarters in H1 2020 compared to 15.4 quarters in H1 2019 reflecting the sharp drop in sales even in the ready to occupy inventory
• Weighted average prices have also fallen across most cities in H1 2020 with NCR, Pune and Chennai seeing the most correction at 5.8%, 5.4% and 5.5% respectively YoY by the end of H1 2020. The resilient Information Technology sector driven markets of Hyderabad and Bengaluru have been comparatively insulated from the economic slowdown but were impacted by the nationwide lockdown imposed at the end of March. Price growth was strong till that point and ended in H1 2020 at 3.3% and 6.9% YoY for Bengaluru and Hyderabad respectively
• The fall in prices and the reduction in average unit sizes of new launches across cities are more in-line with the contemporary home-buyer’s needs. However, the precipitous decline in the GDP growth rate and the fall in consumption expenditure that has affected every industry, is also debilitating for the real estate sector which has not seen any meaningful improvement in sales for the past few years now. With the COVID 19 crisis, ensuing income uncertainty and poor consumer sentiments, demand would be further severely hit in 2020. On the positive side, the Reserve Bank of India’s (RBI) mandate in October 2019 to link all retail loans including home loans to an external benchmark such as the RBI’s REPO rate has brought down home loans to near 15-year lows of 7%
• The residential real estate market stands precariously poised with a funding crisis only having gotten worse in H1 2020. The six-month moratorium on term loans till August 31st, 2020 has reduced immediate pressure on servicing their debt burden but cash flows are under pressure like never before. The six-month extension on RERA completion dates for all registered projects scheduled for completion after March 25, is another measure to help developers cope with this highly stressed environment. However, this temporary lease on life might not be significant enough if homebuyer sentiment and sales do not revive. The near-term outlook on sales remains bleak and depends completely on how the pandemic impacts the economy in the second half of the year
https://content.knightfrank.com/research/2028/documents/en/india-real-estate-residential-office-h1-2020-indian-real-estate-residential-office-7302.pdf
