India’s property industry in turbulence

Real estate sector has been one of the key drivers of Indian economic growth during the last decade. The housing sector of India ranks fourth in terms of multiplier effect on the economy. However in last few quarters, persistent inflation and high interest rates caused a dent in the growth of this sector. Affordability is a major concern for middle class Indians and a steady rise in housing prices together with high interest rates and inflation has neither helped their cause, nor has it benefited the real estate sector. As a result, experts are predicting a price correction in the housing sector of the country.

The sector showed some signs of recovery in the second half of 2012 with growth in number of transactions as well as improvement in absorption rates. However, the pessimistic growth and inflation figures witnessed in early 2013 again brought a slump in the market. A price correction took place in the commercial lease and rental segments of major cities. The slowdown in economic growth and vacant office spaces acted as catalysts in lowering rental prices of commercial properties in major hubs of the country. Residential prices, though, showed resilience and registered growth. The housing transaction volume index declined in the first three months; grew briskly in the next six and remained flat in the last three months in 2013. After a subdued first half of 2012, the index rose in the second half of 2012. BSE Reality Index, which represents the largest companies in the sector, rose in the second half of 2012 but witnessed a sharp decline in the first half of 2013.

The near term outlook for Indian property is negative because of low absorption, high interest rates and high inflation. Most of the leading real estate players are suffering from high debt levels and low profitability. However, looking at long term, the large supply/demand gap in the residential market and rising per capita income of Indians, along with increasing urbanization bodes well for this sector.

Key Findings

• In a report      published by the Ministry of Housing and Urban Poverty Alleviation, it was      estimated that at the start of 12^th five year plan (2012-17)      the total urban housing shortage in the country was around 18.78mn.
• According to      Economic Survey of India 2012-13, the real estate sector accounted for      around 10.8% of GDP as of FY12. The housing sector ranked fourth in terms      of multiplier effect on the economy. During the period 2008-12, the sector      grew at a CAGR of 11%.
• Between January 2000 and March 2013, real estate      and construction development sector witnessed a cumulative FDI of USD      22bn. The sector accounted for 11% of the total cumulative FDI received      during this period.
• The combined market capitalization of the companies listed on the BSE realty index was around USD 10bn as of August 20, 2013. After a subdued first half of 2012, the index rose in the second half of 2012. However, it again witnessed a sharp decline in the first half of 2013.

Chart: Monthly average closing price of BSE Realty Index (in INR)

Source: BSE

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Rising number of vacant homes haunted by inflation in India?

The Indian economy experienced an economic slowdown with high inflation in fiscal year 2012. India’s property industry suffered a major slowdown with declining sales and rising inventory levels in the first half of 2012. In August 2012, the Indian finance minister said in a meeting with the heads of public sector banks that around 500,000 flats were lying vacant in Mumbai despite a robust demand for housing. Affordability is a major concern for middle class Indians and a steady rise in housing prices together with high interest rates and inflation has neither helped their cause nor benefited the real estate sector. As a result, experts are predicting a price correction in the housing sector of the country.

In the first half of 2012, a price correction took place in the commercial lease and rental segments of major cities. The slowdown in economic growth and vacant office spaces acted as catalysts in lowering rental prices of commercial properties. Residential prices, though, showed resilience and registered growth. The housing transaction volume index declined in the first three months, further indicating sluggish sales in the sector. An increase in residential property prices, despite decline in sales, highlights the presence of a bubble in the housing segment of the country, marked by an artificial demand creation.

The near term outlook for Indian property is negative because of declining sales, high interest rates and high inflation. Most of the leading real estate players are suffering from high inventory levels which may create working capital problems. However, looking at long term, the large supply/demand gap in the residential market and rising per capita income of Indians, along with increasing urbanization makes this sector stable.

Key findings

• In a report published by Ministry of Housing and Urban Poverty Alleviation, it was estimated that at the start of 12th five year plan (2012-17), the total urban housing shortage in the country was around 18.78mn.
• According to  National Housing Bank Residex, 6 of the 14 cities recorded a y/y decline      in housing price index in the second quarter of 2012. However, all  four metropolitans, Mumbai, Delhi,  Chennai and Kolkata, recorded growth in housing price for this period.
• Commercial property rentals went through a decline in the first half. Mumbai central business district, the third most expensive commercial hub, saw a y/y price decline of around 15% while Delhi’s Nehru Place recorded a decline of 8.5% y/y. Most of the major commercial hubs in Delhi and Mumbai, the two economic pillars of India, saw a decline in price rentals or  very small growth.
• The all India house transactions volume index released by Reserve Bank of India remained flat with a y/y change of 0.2% in March 2012. It declined by  1.9% on a q/q basis.

Chart: RBI house transactions volume index- All India (Mar 2009=100)

Source: CEIC Data

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