The residential real estate sector in India has had its ups and downs for two years now. Negative news about real estate seem to be all the rage with the media these days. Luxury real estate, in particular, has been getting very bad press of late. Let us take a quick look at what is really happening on the ground, and what is driving it:
- India’s GDP growth for FY’17 has been pegged at 7.1%. The number of Indian ultra-HNIs jumped to 2 lakh in 2015 from 1.84 lakh in 2014; it currently stands at 2.36 lakh and is expected to reach 483,800 by 2025. India is currently home to the world’s fourth-largest population of millionaires in Asia Pacific region.
- GDP per capita income in India is USD $2000 and will increase to USD $3500 by 2020. Higher incomes naturally translate into a higher appetite for luxury housing. Meanwhile, prices of luxury housing have corrected post demonetisation. They will not fall further, but the luxury homes buyer segment – including NRIs – is keenly aware that this is an optimal time to invest.
- The Indian real estate market will almost double to $180 billion by 2020 from the $93 billion it accounted for in 2014, thereby accounting for 13% of the GDP compared to the current 5-6%. Luxury housing constitutes almost 4-5% of the total real estate market and with overall pie increasing, share of luxury housing is bound to increase
India is a constantly growing, developing country, and its housing deficit is the stuff of legends. Currently at around 17.5 million units, most of the deficit is in affordable housing – meaning very low-priced homes to house the bulk of the country’s homeless or those living in informal housing such as slums. This is the segment where demand is the highest.
The Mid-Income Housing Story
Mid-income housing – or housing that caters to the better-off middle class – also sees a lot of demand, but such housing needs to be in good locations with sufficient infrastructure, priced right and within reasonable completion timelines to attract the latent demand. The oversupply that exists in this segment is largely because many projects have fallen short of a few or all of these fronts.
Given the huge pent-up demand for mid-income housing, this supply will eventually be absorbed – excess supply is usually measured in the number of months it will take for it to be sold. In most Indian cities, there is excess supply in this segment because most of the demand is from end-users, not investors. There is a basic lesson here that Indian developers were slow to learn, and by the time they woke up to it, they were saddled with a lot of very slow-selling inventory. The lesson is that investors are no longer a major force on the residential market – most markets are primarily driven by actual buyers.
The previous boom years had seen a lot of real estate speculation happening. Investors were literally bulk-buying into cheap under-construction housing projects in hot emerging development corridors. Their intention was to buy cheap and sell at considerable profit when the projects were complete, the locations picked up and demand for homes there rose. Developers had gotten quite used to this phenomenon, and launched housing projects at breakneck speed.