In its year-end assessment of the real estate sector, ICRA has maintained a negative outlook for the residential real estate (RRE) segment and a stable outlook for commercial real estate (CRE) segment.
The performance of the RRE segment continues to be muted, owing to the prevailing liquidity crunch, high inventory overhang, weak affordability and subdued demand conditions. Sales traction remains slow, particularly in markets with large unsold stock, such as Delhi-NCR, Mumbai-MMR and Pune, resulting in continued over-supply. Moreover, with most of the unsold inventory comprising either units with high ticket sizes or units located in peripheral areas with weak network infrastructure, the challenges associated with liquidation of the stock are expected to continue.
On the positive side, the sales in the sub-Rs 50 lakh segment have witnessed considerable momentum and given the government incentives for development and offtake of affordable housing units, positive trends in both demand and supply for this segment are expected to continue going forward. Further, with home-buyers increasingly leaning towards reputed developers with an established track record of on-time and quality project completion, larger players have also been registering healthy sales and project launch levels, despite the overall sluggishness in the industry. Thus, the market share of such developers has been increasing, and this trend in market consolidation is expected to continue. Structural changes, including the implementation of RERA, GST and IBC, as well as the earlier demonetisation drive, have further underpinned this consolidation, and have supported confidence levels among home-buyers. Nonetheless, a broad-based recovery in demand across the sector appears to be some time away.
One of the key challenges currently impacting the supply dynamics for the RRE sector is the liquidity crunch in non-banking financial company (NBFC) and housing finance company (HFC) segment. The residential realty segment has, in recent years, increasingly relied on NBFCs and HFCs to raise debt financing, owing to the risk perception attached with the segment by banks. However, with the prevailing liquidity squeeze, funding availability and cost for many real estate developers has been adversely impacted, causing credit stress for developers reliant on refinancing to support balance sheets heavy on slow-moving inventory or land assets. Consequently, the execution of ongoing projects and launch of new projects have also been negatively impacted, especially for smaller players who have been heavily dependent on such sources of financing, keeping the pipeline of fresh supply moderate. ICRA, however, notes that government measures, such as the establishment of a Rs 25,000 crore funds for stalled housing projects, may alleviate some of the execution/delivery-related issues going forward.
Concerns on overall stock levels, however, remain. A moderate level of new launches, combined with the existing inventory overhang and low sales traction, is expected to lead to overall inventory levels registering modest growth over the near-to-medium term, with the much-needed liquidation of the same being contingent on a wide-scale recovery in demand. Consequently, ICRA expects residential real estate developers to maintain a cautious stance towards new project launches and land acquisition deals.
With continuing weakness in home-buyer sentiment, demand is expected to remain muted, particularly for projects which are under-development and for units with high ticket sizes. Further, the directive from the National Housing Bank (NHB) discouraging loans under subvention schemes, wherein developers bear the interest on behalf of home buyers for a certain period of time, is also expected to have some adverse impact on demand levels for projects using such schemes to market their units. However, certain categories, such as affordable housing developments and good quality completed inventory, especially by reputed developers, are expected to witness positive sales momentum. Given the changing demographic profile of cities on the back of increasing urbanization and inward migration, housing demand has largely been concentrated in the affordable/lower ticket-size segment. Government initiatives for affordable housing have provided further impetus to this demand. An increasing number of developers are acknowledging this trend and responding by reconfiguring existing phases/launching new phases with a focus on lower unit prices.
Moreover, post the incessant delays witnessed in project deliveries, buyers have been expressing a strong preference for completed inventory, that too from recognized developers with an established track record of quality and timely delivery. Thus, larger and reputed developers with a strong focus on right-pricing and delivery are expected to continue to record healthy sales levels. Prices, however, are likely to move on a downtrend, driven not only by the continued focus of developers on keeping average ticket sizes affordable, but also by the high inventory overhang and overall sluggishness in demand.
As for the CRE segment, ICRA has given a stable outlook. In contrast to the residential segment, the commercial realty sector witnessed robust demand for leasing of office space across most cities. Moreover, the CRE segment has been relatively less impacted by the liquidity issues that have constrained funding availability in the residential realty segment. Notwithstanding concerns about ongoing domestic economic slowdown, demand for office space has been resilient on the back of expansion and consolidation plans of various multi-national and domestic corporations. The financing environment for the segment is also favourable in light of the successful listing of the first Real Estate Investment Trust (REIT) in India, as well as the strong interest for rental yielding assets demonstrated by foreign investment funds.
Most of the tier 1 markets have witnessed stable or increasing absorption of office space during 2019 as compared to 2018. Markets such as Bengaluru, Hyderabad, Delhi NCR and Mumbai witnessed increased completions during the year, partly on account of the upcoming sunset date for SEZ benefits in March 2020. Despite the incremental supply, strong leasing demand resulted in vacancy levels continuing to trend downwards in the key micro-markets. The Hyderabad market closely trailed Bengaluru in absorption of office space during the year. While the healthy pre-leasing position in the recently completed buildings has resulted in thin vacancy levels in the prime locations such as Madhapur, the city is likely to witness large scale supply over the next two to three years. Continued leasing traction which can absorb such large supply will be a key monitorable for the market. Other cities are expected to report completions and leasing demand that are consistent with the long-term average trends.
The commercial segment continues to benefit from ongoing trends such as the strong interest from institutional investors in building commercial real estate portfolios, consolidation of office spaces by large tenants resulting in increased demand for large-format office parks and healthy rental appreciation in certain micro-markets. Co-working companies were among the largest occupiers of office space in the past two years; while the interest in the space continues to be high, the increasing market scepticism about the valuations in the segment may result in some moderation in growth plans for a large number of the co-working companies.
Along with the office leasing segment, the industrial warehousing and retail mall segments have also benefited from stable demand profile from occupiers and favourable investment outlook.
The demand for industrial warehousing, in particular, has been driven by large scale expansion of warehousing and logistics facilities for e-commerce market places and third-party logistics service providers.
The listing and subsequent stock market performance of the first domestic REIT, sponsored by Embassy and Blackstone, is expected to provide an impetus for more such vehicles. Many developers and investment funds have aggregated large portfolios of rent-yielding assets, which translates into a strong pipeline of potential REIT listings. Going forward, ICRA expects demand and supply levels to sustain at the long-term average levels in the major cities, which will support a further expansion of the asset portfolios of the established incumbents. The first half of 2020 is expected to see further supply and absorption of space in SEZ buildings ahead of the sunset date for expiry of tax benefits. While the demand for office space appears to be decoupled to a large extent from the domestic macro-economic headwinds, the resilience of such demand trends may be tested in case of a sustained weakness in demand from sectors such as IT services and banking, financial services and insurance (BFSI), which currently contribute the largest share of leasing activity.