Residential sales are witnessing recoveries and have returned to pre-Covid levels after a tumultuous few months. People are stepping out and visiting sites. Branded developers in mid-range markets are witnessing some traction. Amid all these, prices have remained range-bound, says Sharad Mittal, CEO, Motilal Oswal Real Estate Fund.
For commercial real estate, new absorptions will depend on how the work from home (WFH) scenario and company policies around it play out over the next year, he adds.
In an interview to BusinessLine, Mittal talks about the outlook for 2021, possible demand patterns in commercial real estate and residential sales and the possibility of private equity players getting back into investment mode. Excerpts:
What is the outlook for residential sales in 2021?
As of now, demand recovery has been witnessed in certain major cities and select micro-markets. People are stepping out of their homes to visit sites and bookings have picked up. Conversion ratios are better than during pre-Covid times. Mortgage rates are at the lowest in the last 15 years.
In certain markets like Mumbai, reduction in stamp duty has helped recoveries. While micro-markets like Mumbai, Gurugram and Delhi may remain slower due to high value inventory, lead indicators point towards a fair demand recovery from pre-Covid levels. We are hopeful of this demand continuing into 2021.
So what are the price points that are driving sales in residential real estate?
Prices are range-bound at the moment. In the mid-range categories of ₹3,500-5,000 per sq feet, demand has been good. There could be 5-10 per cent rise over the next year. However, the premium segment, in the ₹7,500-8,000 per sq ft price range, will remain under pressure.
Affordable housing continues to do well. Branded players will attract more demand across segments. In order to de-risk themselves, people will also look at projects where possession is available over the next 12-18 month period.
What is the scenario with unsold projects?
Nearly 70 per cent of the unsold housing stock is in major cities like Mumbai, Delhi-NCR, Bengaluru, Hyderabad, Chennai and Pune. This continues to remain an overhang in this segment.
For instance, the average time taken to sell all unsold inventory in Bengaluru or Hyderabad is 15-24 months, while in Delhi it is around 50 months; in Mumbai it hovers around 35 months, and in Pune, it is around 15 months.
An inventory overhang of 12-18 months is not a major cause for concern for developers. Anything north of 24 months makes it a buyer’s market. However, due to the increased affordability and mid-range pricing, IT cities will see a faster turnaround in terms of unsold stock.
How is the liquidity scenario with developers?
Liquidity has been lacking in the sector for the last two years now. NBFCs dominated the lending cycle from 2014 to 2018; but they are in a crisis right now. PSU banks have gone slow in lending to the construction sector and private banks have become selective as they focus on cleaning up existing portfolios. As a result, developers have to depend primarily on internal accruals through sales, own equity and other sources of debt funding. This scenario has put branded developers with strong balance sheets at an advantage.
Why does PE funding remain low in residential real estate?
After some years of a slowdown, the residential real estate is witnessing recoveries and improved buyer confidence with implementation of RERA. Recovery will be slow and will be led by certain micro-markets. However, one cannot expect an overnight turnaround as both the industry dynamics and the regulatory environment have changed significantly.
Domestic PE funds continue to invest in residential real estate. However, the foreign funds have preferred commercial real estate as a part of their yield strategy. A few foreign funds have shown a keen interest to invest in residential portfolios over the last few months, and as the sector recovers, I believe that more PEs will focus on residential real estate.
Finally, what is the outlook on commercial real estate and office absorption?
Commercial real estate has had a good run over the last few years till March 2020.
Going forward, a lot will depend on how the work from home scenario plays out. IT/ITeS companies, which are the largest occupiers of commercial real estate, have favourably adopted the WFH model. However, it will take at least 6-9 months to ascertain whether or not this can be a sustainable long-term strategy. Till then, it is unclear how office absorption would change over the next 12-15 months.