While the Reserve Bank of India's repo rate pause will bring relief to the real estate sector, it may still be early to expect the sales of mid-sized and affordable homes to pick up, according to analysts
The RBI has increased the benchmark repo rate by 250 basis points since May 2022, and the last 25-basis-point hike early this year pushed home-loan rates close to the pre-pandemic levels of 2019.
India's residential real estate market grew over the past 18 months as the economy emerged from the coronavirus pandemic's shadow. Low interest rates and relatively lower prices sparked the revival, driven by demand for luxury homes. The momentum sustained even as interest rates rose.
"The residential market breached a nine-year high in terms of annual sales in 2022 in an inflationary environment that caused increasing concerns on economic growth across the world," Knight Frank India said in a report. "Therefore, while the momentum looked strong, it remained to be seen if it would sustain in 2023 as well."
Sales rose 14% in the quarter ended March to 1.13 lakh units, according to data from Anarock Property Consultant Pvt.
Affordable Homes Growth Stagnant
All the segments are growing. But the rate of growth in the mid-sized and affordable homes segments lags that of super luxury, according to Gulam Zia, senior executive director at Knight Frank India.
The super-luxury segment found buyers like never before after Covid, according to Zia. But the mid-sized segment, contributing 45–50% to the total transactions, has seen a quarterly growth of 5–7%, Zia said. "Home-loan interest-rate hike bothers the affordable-housing segment the most and, hence, we are not seeing growth there."
"The RBI pause will not help to correct the damage, which has already been done by the 250 bps rate hike since May 2022 to the affordable housing sector," Zia said. "To see a material impact, we will have to see a reversal in the rate hike cycle as this pause is not something to cheer about for the lower end of the market."
Rupesh Sankhe, vice president at Elara Capital, said the supply in the high-end luxury segment had been slow in comparison to the demand, which increased significantly. "Companies like Oberoi Realty Ltd. and DLF Ltd. are benefitting from the demand-supply mismatch in the luxury segment."
"Mid-sized and affordable-segment buyers were on a wait-and-watch mode due to high interest rates," Sankhe said. "Now, with the RBI repo rate pause, we could see traction starting to come back in these segments."
Sankhe expects earnings visibility and improved balance sheet for the real estate companies due to better cash flows.
Momentum To Continue In 2023?
Zia expects the sales momentum to continue in 2023 amid concerns about slowing economic growth. Things could only improve for the sector with the pause or a reversal in rates, he said.
He cautioned that price hikes are the only thing to worry about as it could kill affordability. "As long as affordability is in place with 5–7% price hikes, the market is not going to see any pain."
Sankhe said the real-estate sector was witnessing consolidation as the top nine listed players' market share is at 22% now from 10% earlier.
The balance sheet of the real-estate firms is becoming stronger with a lower debt-to-equity ratio. The recovery is expected to continue and it will benefit the listed players, according to Sankhe.
Time To Invest?
Zia advised not to buy a property from an investment perspective. Real estate should be solely for living and not an investment as it is an illiquid asset with a low- to mid-single digit appreciation rate.
Sankhe is positive on the developers in Bengaluru, National Capital Region and Mumbai. With a conservative valuation, Elara is betting on Prestige Estates Projects Ltd., Sobha Ltd., Brigade Enterprises Ltd., Mahindra Lifespace Developers Ltd. and Oberoi Realty to deliver a 30–50% returns in the next one to two years.
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