Amit Pathak | Sharekhan Education
India, the second-most populated country in the world is a housing deficit country. With ~70% of the incremental employment being created in urban India, the rate of urbanization will only increase hereon, with the expectation of~40% of the country’s population living in urban India by 2030. In the coming decade, a new class of home buyers will enter the market. Developers with a strong ‘brand recall’ and proven execution track record will benefit.
The Work From Home (WFH) phenomenon has shifted consumer preferences towards large houses which can accommodate a small office set-up and provide open spaces. There is a strong affinity towards ready-to-move-in properties. Analysis of ticket size for housing loans given by banks over the last 5 years shows a preference for higher ticket size in the industry benefitting premium segment.
Earlier the real estate business in India was highly unregulated and largely driven by localized players. Government policy initiatives including RERA, demonetization and GST rate reduction in April’19, and adoption of IndAS115 on revenue recognition have restored credibility and transparency in the sector. Capital is getting formalized across the supply and demand sides of the sector. As a result, developers with the capability to execute projects have gained market share from unorganized players.
Covid-19 has accelerated industry consolidation in favor of the large developers. The share of larger developers in housing sales in India’s top seven cities has nearly quadrupled since FY17. To avoid any risk to their investments and ensure quality, home buyers are preferring to deal with large corporate and branded developers. Several established conglomerates including Godrej, Mahindra, Tata, etc. have now been betting high on long-term real estate trajectory in India by extending their brand into the real estate vertical.
On the demand side, Home purchase affordability has been on the rise given the decadal low-interest rate (sub-7% now vs 10% in Mar’15). State initiative (e.g. Maharashtra, Karnataka) like reduction in stamp duty has further boosted the demand. NRIs have been actively looking to buy houses across micro-markets in the country. On the supply side, developers received reliefs in the form of the extension on project completion timelines, loan restructuring scheme, and credit infusion into the system.
Commercial Real estate is witnessing some green shoots in the form of: (i) pre-leasing in certain projects; (ii) several RFPs being active; and (iii) vaccination progress. We believe the pandemic’s second wave will keep near-term demand/rents under pressure.
While initial green-shoots of demand revival are visible, sustainability would be critical once the economy normalizes. Brand, people, and capital remain the key mantras for long-term wealth creation in the sector.
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