The unending euphoria over real estate, which India has been witnessing over the past few years, is finally starting to show signs of ebbing, and that is probably healthy news for the long-term growth of this sector. Collapse of a few recent PE deals, postponement of capital-raising plans by developers and poor response to government land auctions are indicators of the “expected slowdown” in Indian real estate chapter.
Recalling the success story of a few years ago when home loan rates sank to 7.5%, it resulted in huge demand for quality real estate and paved the way for the spiking in property rates in many cities. Since then this industry displayed an unstoppable upward curve. However, today, with interest rates already very high with negligible scope of reduction due to inflationary pressures, the real estate momentum would not be the same.
Signs of a slowdown have started becoming visible in the residential sector. There has already been a marginal decline in rental and capital values of apartments across a few micro markets and the trend will only gain momentum as we move ahead, especially in peripheral and suburban locations where significant supply is in the pipeline. Even the office market has not escaped. It has witnessed stagnancy in rentals in majority of locations in Q1 2008.
This trend, given the sharp rise in rental values over the past few years, is important. IT/ITES, a major demand driver for office and residential property, is not expected to digest the future supply in the medium term. Given the supply ramp-up of 82 million sq ft of office space across seven major cities in 2008, it is expected to put pressures on rental values leading to deceleration in medium term.
Over all, this slowdown is aided by factors like the fall in stock markets,hike in interest rates, strengthening of the rupee, global slowdown, rising input costs of building material. That said, the demand drivers for real estate segments remain fundamentally strong for the long term due to the opportunities that even a moderate GDP growth rate will produce. So, we are probably at the end of a cycle where slowdown is for real. But given the robustness and fundamental long-term nature of the demand, we will see the beginning of another cycle in a few years.
The repercussions of the US subprime crisis and the slowdown are sure to show up in the rest of the developing world. India is not likely to be any different.
We have already seen some amount of rationalisation of real estate prices, particularly in the residential sector. This is probably because of a combination of factors — decline in the purely speculative investments, high interest rate for home loans, and a glut of availability of units in some areas like Sohna-Gurgaon Road in the National Capital Region — coming together.
However, this rationalisation is not an across-the-board phenomenon. We have, for instance, not witnessed any decrease in the prices of quality housing or in prime localities. Yes, the rate of growth may have, however, come down of late. Transaction time also appears to have gone up. This is because end-users and the long-term investors tend to take a much longer time to decide. But I remain bullish on the real estate market of North India.
The situation is vastly different in the case of the retail and commercial sectors, which are as buoyant as ever though many reports claim otherwise. Even in the case of residential housing I can foresee a growth in the middle class socio-economic groups, a big market for 2-3 bedroom flats costing Rs 20–30 lakh. Thus, all this ‘talk of a slow down’ in the real estate sector is much exaggerated. If at all it is more of a correction and not in anyway a ‘crash’.
The economy of the country is booming! The nationwide shortage in housing units is placed at a massive 20-25 million units. And the explosion in the IT/ITES sector will remain for a while. And now more triggers such as the biotech, education and hospitality industries are waiting in the wings. These emerging sectors would be the new elements to make up the new economic boom. So in my opinion the real estate success story will continue for many more years to come. The price corrections in the real estate sector will not dampen the growing demand.