Real Estate Sector: Fundamentals Remain Intact Despite Signs of Fatigue
After a strong rally in the last one year, the real estate sector is showing signs of fatigue. However, fundamentals remain intact with improved affordability, industry consolidation, and favorable supply-demand.
Real EstateFundamentalsReraIndustry ConsolidationCommercial LeasingReal EstateSep 15, 2024
The sector has been an underperformer during 2014-2019 due to high inventory levels, weak execution, and questionable industry practices. However, the implementation of RERA has been a game-changer, bringing structure to the industry and restoring consumer trust and confidence.
Improved affordability is one of the key factors driving the sector's growth. Current housing affordability is at multi-year high levels despite price increases after COVID. Nominal wage growth has been higher than real estate price increases for almost a decade, leading to consistent improvement in affordability.
The supply-demand dynamics have also improved significantly. Since 2017, demand has outstripped launches, leading to a consistent drawdown of inventory. Current inventory levels are at a decadal-low level of 12 months, against the peak of 33 months in 2017.
Industry consolidation is another positive trend. 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 a positive factor. Office absorption is increasing every year since COVID, with a greater proportion of demand coming from 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. 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. The NCR and Hyderabad markets are causing concern due to different reasons. The NCR has seen a total wipe-out of developers barring a few, leading to a supply constraint environment. This has led to maximum price appreciation in the NCR (~ 100% since COVID 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 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 the current state of the real estate sector?
The real estate sector is showing signs of fatigue after a strong rally in the last one year. However, fundamentals remain intact with improved affordability, industry consolidation, and favorable supply-demand.
What is the impact of RERA on the real estate sector?
RERA has been a game-changer for the real estate sector, bringing structure to the industry and restoring consumer trust and confidence.
What are the key factors driving the sector's growth?
Improved affordability, industry consolidation, and favorable supply-demand are some of the key factors driving the sector's growth.
What is the current state of inventory levels in the sector?
Current inventory levels are at a decadal-low level of 12 months, against the peak of 33 months in 2017.
Which markets are causing concern in the sector?
The NCR and Hyderabad markets are causing concern due to different reasons, including supply constraint environment and oversupply in the commercial market.
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