Indian Real Estate: Fundamentals Remain Strong Despite Cyclical Slowdown
Current housing affordability is at multi-year high levels, favorable supply-demand dynamics, and industry consolidation drive growth in the sector
Indian Real EstateHousing AffordabilitySupplydemand DynamicsIndustry ConsolidationCommercial LeasingCapital ManagementReal Estate MumbaiSep 15, 2024
Improved affordability is one of the key drivers of growth in the sector. Current housing affordability is at multi-year high levels, despite price increases after COVID-19. The nominal wage growth has been higher than the real estate price increases for almost a decade, leading to consistent improvement in affordability.
Favorable supply-demand dynamics are also supporting the sector. Fundamentals started improving even before the pandemic, but the pace of improvement really picked up after COVID-19. Since 2017, demand has outstripped launches, leading to a consistent drawdown of inventory. Current inventory at a pan-India basis is at a decadal-low level of 12 months, against the peak of 33 months in 2017.
Industry consolidation is another trend that is benefiting the sector. The share of Grade A developers has constantly been increasing, and some estimates put it at one-third of the total supply in major cities. Larger reputable developers are in a win-win situation as both supply and demand are gravitating towards them.
Strong commercial leasing is also driving growth in the sector. Office absorption is increasing every year since COVID-19, with a greater proportion of demand coming from the GCC. The year 2023 was the second-best in terms of office absorption, and data suggest 2024 will surpass the previous high of 2019 by at least 50%.
Better capital management is also a key factor supporting the sector. Companies are now focused on sales velocity rather than land banking. Joint development/joint venture, which is structurally less capital intensive, are now the preferred route of project addition.
However, there are a few signs of worry in the sector. The NCR and Hyderabad markets are causing concern due to different reasons. The NCR, due to past excess, has seen a total wipe-out of developers barring a few. This supply constraint environment has led to maximum price appreciation in the NCR (~ 100% since COVID-19 vs all-India price rise of ~30%), with large demand chasing small supply.
Hyderabad is the only major market among the top seven cities where absolute inventory is higher compared with pre-COVID-19 days. Even in terms of the number of months of inventory, this is higher than other markets. The commercial market in Hyderabad is also the most oversupplied one with higher vacancies than the national average.
We believe that the fundamentals of the sector are broadly intact, and large, listed players will continue to outperform smaller peers. Real estate remains one of our preferred sectors for investments. However, we remain selective, betting on developers with better execution, sales velocity, and the ability to recycle capital faster.
Frequently Asked Questions
What is driving growth in the Indian real estate sector?
Improved affordability, favorable supply-demand dynamics, and industry consolidation are driving growth in the sector.
What is the current state of housing affordability in India?
Current housing affordability is at multi-year high levels, despite price increases after COVID-19.
What is the trend in office absorption in India?
Office absorption is increasing every year since COVID-19, with a greater proportion of demand coming from the GCC.
What is the impact of industry consolidation on the sector?
Industry consolidation is benefiting the sector, with larger reputable developers in a win-win situation as both supply and demand are gravitating towards them.
What are the concerns in the NCR and Hyderabad markets?
The NCR market is causing concern due to supply constraints, while Hyderabad is the only major market with higher absolute inventory and oversupply in the commercial market.
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