Making sense of recent trends in Indian Real Estate

This article of mine first appeared in Moneycontrol Nov 2017

This is a factual article, with no forecasts or outlook of the market, but helping in understanding more the actual trends in Indian Real Estate sector in the past two quarters (Apr-June 2017 and Jul-Sep 2017).

New homes launched

As per the PropTiger-Housing Data Labs report of Q2FY18 (Jul-Sep 2017), Developers had launched Projects with an average of 46,000 homes (units) in each of the four quarters of FY17 (Apr 2016-March 2017). Thus, about 180,000 homes were launched that year. Launch means announcing the commencement of sale of a Project, with proper Plan of the building etc..  60% of these Units were launched in Pune, Bangalore and Mumbai, almost equally between these three cities.

 

Number of new units launched fell from the above average of 46,000 to 29,000 in Apr-Jun quarter of 2017, and further to 22,000 in Jul-Sep 2017! Of this 22,000, 14k came from Mumbai + Pune – a whopping 63%! This matches with the fact that of all the states in India, Maharashtra has been the first one to get its act together on RERA. They stuck to the May 1-Jul 31 “settling down” period, and have taken actions accordingly. That 63% of new launches in India have come in Mumbai and Pune clearly shows that RERA having stabilized in Maharashtra, Developers have got back to work there.

Other states still seem to not have got their complete act together on RERA. The reasons for dragging their feet could be different. The most uncharitable explanation being given is the strong nexus between local government and builders. At best, we could blame the delay on execution sluggishness. There is a significant risk that this unstable environment will continue in such States for a few more quarters, and we can see number of launches subdued in these states.

It remains to be seen that after RERA stabilizes, will number of launches go back to the 46,000 units quarterly level again ? Or will the RERA clause of setting aside 70% of the Project funds in an ESCROW account be a slight deterrent and Launches may not go back to the original level immediately ?

Homes purchased

Let’s look at Sales now. How many units were actually bought by people in the above time periods ? Again, going to the Data Labs data, we had seen that people purchased an average of 51,000 units per quarter in each of the four quarters of FY17 (Apr 2016-March 2017). Thus, about 200,000 units were sold in that entire Year. Again, not surprisingly, 60% of these units were sold equally between the three cities of Bangalore, Pune and Mumbai. This fact has to be seen in the perspective that just 3-4 years back, in FY13 and FY14, 40-50% of homes sold were in Delhi NCR! So, the Indian real estate sector has seen a composition mix change in the past 3-4 years, something which some Analysts have glossed over. Further, Bangalore and Pune had no business being equal to Mumbai in sales, since Mumbai is about 3 times Bangalore and 5 times Pune in commercial size and strength. This hence showed the relatively poor performance of Mumbai, an over-priced market. Bangalore and Pune continued to gain from the inward migration of graduates following the employment generation in IT sector. Bangalore also stole a march by cornering most of the Internet start-up jobs. New homes clearly follow jobs. Mumbai managed to salvage some pride with some growth of late in the BFSI sector.

Let’s see now as to what happened in the past two quarters in sales. Apr-Jun 2017 saw 53,000 units being sold, just above the average of FY17, despite a crunching fall of new units launched from 46,000 to 29,000 as described above. This is because the proportion of new launches in sales has been falling progressively over the past two years, from a high of 40% 2 years back to 20% now. Hence, the impact on sales was not immediate. Sales however fell in Q2 (Jul-Sep 2017) to 45,000. The double impact of low launches in Q1 and Q2 should be felt on sales in coming quarters.

Sales have fallen to 45k, again 43% coming from Mumbai+Pune. But this is not too different from past, when top 3 cities used to give 60% of sales – it’s 59% even now. Hence, looks like consumer psyche has not changed too much because of RERA (which makes sense – if anything, sales should increase because of RERA protection). However, the 18% across-the-board fall in sales has possibly come because of confusion in GST on property prices, and that’s a national phenomenon.

Three Key segments

Let’s now take a quick look at data on everyone’s favourite – the affordable segment! While there is much brouhaha of late about Affordable houses selling more, houses priced below Rs 50 lakh were selling 56% of total throughout FY15 (Apr 14-Mar 15), fell to 52% in FY16 and remained at that level in FY17 (except Q4FY17 when it shot to 58%), and has been in 52-54% range in FY18 also. So this segment has been fairly constant in the past few years!

A further bigger insight from the above is that majority of this segment sale is in the Rs 25-50 lakh segment and not in the <Rs 25 lakh segment. In fact, the <Rs 25 lakh REAL AFFORDABLE HOUSES have been in the 17-19% range of total sales for the past 3 years, having inched to 18-20% now. The Rs 25-50 lakh segment saw 35% of all sales happening in that segment. So, it is some time before the Government’s dream of true affordable houses really takes off well.

Let’s round this piece up with a look at sales in the Under-construction vs Ready-to-move in (RTMI) Units. 16-17% of the total sales done were in the RTMI segment, rest being under-construction sales. While RTMI units sold in the Market have increased from 10k per HY to 20k over last 2.5 years, in absolute terms, they are still 16-17% of the total primary units sold.

So all in all, the Indian residential real estate market is poised at an interesting juncture. Even as we speak, the festive season has been largely disappointing. Industry insiders would be well-advised to look at the trends within trends and shape their plans accordingly not to get disappointed in the medium run.

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