Real Estate Sector Remains Intact with Strong Fundamentals
real estate, market news, nifty, sensex, housing affordability, commercial leasing
Real EstateMarket NewsNiftySensexHousing AffordabilityReal Estate NewsSep 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 a key driver of the sector's growth. Current housing affordability is at multi-year high levels despite price increases after COVID. The nominal wage growth has been higher than real estate price increases for almost a decade, leading to consistent improvement in affordability.
Favorable supply-demand dynamics are also supporting the sector. Demand has outstripped launches since 2017, 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.
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 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 another key aspect of the sector's growth. 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 and maximum price appreciation. Froth is more on the lower end of the quality spectrum rather than at the top-end.
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.
About Aditya Birla Sun Life AMC
Aditya Birla Sun Life AMC is a leading asset management company in India. The company offers a range of investment products and services to individual and institutional investors.
Frequently Asked Questions
What is the current state of the real estate sector in India?
The sector is showing signs of fatigue after a strong rally in the last one year, but we believe that we are at the midpoint of a cyclical recovery.
What are the key drivers of the sector's growth?
Improved affordability, favorable supply-demand dynamics, consolidation, strong commercial leasing, and better capital management are the key drivers of the sector's growth.
Which cities are causing concern in the real estate sector?
The NCR and Hyderabad markets are causing concern due to different reasons.
What is the outlook for the real estate sector?
We believe that the fundamentals of the sector are broadly intact, and large, listed players will continue to outperform smaller peers.
What is the investment strategy for the real estate sector?
We remain selective, betting on developers with better execution, sales velocity, and the ability to recycle capital faster.
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