Building optimism for India’s property market in the new year

A bleak spell for Indian property may continue, but sliding values, high vacancy rates and weak sales should soon give way to growth as elections are held and new investment opportunities open up.

Cyclists and traffic pass in the Chembur area of Mumbai. Indian property has struggled under weak economic conditions, but is expected to rebound this year. Dhiraj Singh / Bloomberg

India’s property market appears to be set to pick up later this year after facing a slew of challenges in 2013, analysts and developers say.

Demand for homes in India faltered last year amid slowing economic growth and steep interest rates.

“High interest rates, spiralling vacancy levels and lower margins arising from inflationary pressures too, led to a slowdown of construction activity leading to a drop in new launches, and also delayed project delivery by several months,” says Shishir Baijal, the chairman and managing director of Knight Frank India. “Developers with exposure to residential projects are particularly worried, with slowing sales leading to a situation of oversupply in many parts of the country.”

The unsold stock of homes in Mumbai, for example, had reached about 130,000 units towards the end of last year, resulting in developers reducing prices by up to 25 per cent, data from Knight Frank shows.

But underlying factors in the sector remain positive, according to Mr Baijal.

“The Indian real estate story continues to be tremendously attractive,” says Mr Baijal. “While, there is a sort of saturation in the Tier I cities, the good news is that Tier II cities have started growing with the IT and industrial sectors investing in such places.

“Thus, Indian real estate is poised for a boom, taking the rest of the economy with it. The notion that Indian real estate is expensive is based more on the cost of undeveloped land, which is becoming a scarce commodity, than finished residential or office space, which is still available at reasonable prices in most places. The momentum remains positive, if we can get the investment story right, lower the fiscal deficit and have more progressive monetary policies being drafted by the [Reserve Bank of India], there’s nothing which can refrain us from coming back on the growth track by the second half of 2014.”

Jones Lang LaSalle (JLL) predicts that demand for property is likely to pick up in the second half of the year, leading to a 10 per cent to 12 per cent rise in capital values across the country this year.

The first half is expected to remain subdued, however, JLL says. Uncertainty created by impending general elections, which are expected by May, means that many buyers are waiting on the sidelines to see the outcome of the polls before purchasing property.

“Consumer confidence will remain subdued during the first two quarters of 2014, owing to uncertainties surrounding the general elections and macroeconomic conditions - both global and domestic,” says Anuj Puri, the chairman and country head of JLL India. “However, [after] the elections, fence-sitting investors are likely to become active. The increase in absorption of residential units will help reduce the currently large inventory holdings of developers. A recently observed trend of a gradual fall in supply in response to the subdued demand will only reverse with a lag, helping prices to strengthen gradually in the second half.”

In New Delhi, home prices in the April to June quarter fell 1.4 per cent from the previous quarter, while prices in Mumbai declined 0.4 per cent, according to data from the National Housing Bank. Residential prices in Hyderabad fell 4.5 per cent over the same period, while home prices in Kolkata slipped 4 per cent.

“As of now policymakers and industries are delaying their decisions in the run up to the general elections,” says Hariprakash Pandey, the vice president of finance and investor relations at HDIL, a property developer based in Mumbai. “This has resulted in a slowdown of activities, which typically happens on road to Indian elections. After the general elections, activities will pick up speed and the conclusion of the election will help improve demand for housing.”

He predicts that residential property prices should increase by 10 to 15 per cent in this year.

“As the global economy also picks up by then, the demand for commercial real estate will also be good in the latter half of 2014,” he adds.

Sunil Jaiswal, the chief executive of Sumansa Exhibitions, the organiser of the Indian Property Show, which is held in Dubai, agrees.

“India will see a growth increase only after the general election in 2014. This growth can be seen across all sectors including real estate,” says Mr Jaiswal.

The slide in the Indian rupee, which tumbled to a series of record lows last year, has resulted in an increase in demand for property in India from non-resident Indians (NRIs), he says.

“From the sales perspective, developers will continue to focus on NRI markets specially in GCC countries as NRIs will continue to cash on the exchange rate … NRIs have certainly gained an upper hand over domestic buyers as the value of property decreased by up to 35 per cent for them and this provides a very healthy environment for investors looking to invest in Indian real estate. The real estate sector in India continues to attract investors despite the health of the economy.”

He says that Mumbai remains a preferred destination for Indian expatriates looking to buy property. “However, owing to the scarcity of fresh land available for construction, Navi Mumbai and other planned townships have effectively evolved as an alternative to Mumbai city,” says Mr Jaiswal. “IT-centric cities like Bangalore, Pune – and to an extent Chennai – are emerging as whole new real estate propositions”

Other “hot spots”, he says, include Delhi and the surrounding National Capital Region, as well as Jaipur, Ahmedabad, Coimbatore and Cochin.

He adds that investing in property India is more of a long-term play and could be difficult to reap gains from in a short period.

“In the current scenario, the Indian property market is definitely not geared up for property ‘flipping’ within short investment periods. Mid to long-term investment options with a four to five-year window would be ideal. Such an investment horizon is a safe hedge against risk related to market variations and ensures that the property gains healthy appreciation regardless of market dynamics.”

Discounts, which are being offered by some developers to clear stock, are likely to continue over the next few months until demand starts to recover, analysts say.

“Considering that sentiments are all set to improve on the back of increased corporate earnings and a revitalised capital market, the current sluggishness in property sales can continue for a maximum of two more quarters,” says Om Ahuja, the chief executive of residential services at JLL India.

“This interim period is crucial for property buyers and investors, as the currently available deals and offers will continue for this period. The basis for this prediction is not conjecture, but the visible presence of economic factors that drive growth in the real estate sector. From this point onward, the clock is ticking and the countdown has begun.”

Analysts say developers and investors will be hopeful of policies that will help to improve transparency and the investment climate. The Securities and Exchange Board of India has been considering introducing real estate investment trusts (REITs) that would provide another way for investors to inject funds into the Indian property market.

“Policy-based efforts are already under way to make the residential real-estate sector more transparent,” says Mr Puri. “India’s capital market regulator has reiterated the importance of real estate investment trusts as a tool to attract large pools of money into the real-estate sector at relatively cheaper cost. At present, participation in real-estate growth is largely restricted to NRIs, HNIs (high net worth individuals) and institutional investors. REITs could open up opportunities for small investors to diversify their asset structure.”

This could provide a significant boost to India’s property market.

“Since REITs are adept at searching for income-generating properties, it could result in extracting new growth opportunities through rental housing projects, affordable housing projects and senior citizen housing projects that will increase the depth of the industry,” Mr Puri explains.

“These factors can help the Indian real estate sector sustain its attractiveness.”