India’s residential market overview—KPMG-Track2Realty Study

By: Neeraj Bansal, Director, Risk Consulting, KPMG India

Track2Realty Exclusive: Slow economic growth affecting housing market

The recent Indian economic growth has been hampered by several domestic and global factors, resulting in the GDP growth plunging to 3 years low at 5.3% in 2QFY13[1]. Factors such as weak global economy, high interest rates, high inflation, high fiscal deficit, and lack of reforms were the primary reason affecting the GDP growth. The residential real-estate market also witnessed slowdown due to weak sentiments created by higher interest rates, and limited creation of new jobs. It is estimated that in last 2012 around 1 lakh fewer white-collar jobs were created, which is evident from lower office space absorption in top seven cities of India lead by economic slowdown[2].

Buyers postponing their decision to buy house

Home buyers are finding it difficult to afford properties in most urban cities of the country as property prices continue to rise despite weak fundamentals. Additionally, buyer’s sentiments are affected by high interest rates, weak job market and expectation of a decline in property prices. Buyers are now preferring to wait and watch before buying a residential property.

Investor-driven markets are most affected

Most affected were the investor driven markets of Northern and Western region, specifically the Delhi-NCR and Mumbai region, which witnessed a sharp decline in launches and absorption of new inventory. The southern and eastern markets which are primarily end-user driven, also witnessed a slowdown in the absorption level but to a limited extent.

But housing prices continue to rise

Contrary to the difficult situation in housing market, the property prices have not witnessed any slowdown and continue to rise. The current property prices in most markets have crossed the peak achieved in 2008 before the global financial crisis set in. This is expected to be the result of a decline in supply of fresh housing stock to the market which balanced the supply-demand of housing property to a large extent.

Record housing prices are supported by curtail in new supply

The supply of new housing unit has been limited from developers, who are finding it difficult to raise funding for the projects from investors. There has been a significant dip in real-estate FDI and PE funding, since investors are looking for a higher return.

Developers are finding it equally difficult to raise debt from banking and other institutions due to lack of equity funding from investors.

Overall, the investors and banks are looking to lend money only to developers which have a strong balance sheet, good track record and have high quality project to offer.

Developers now focusing on affordable housing projects

Noting the development in the housing market and the low interest shown by customers in new property launches, the developers are now stressing on developing affordable housing. The demand for affordable housing in the country is largely insulated against the slow down, since there is a significant shortage of housing. In 2012, there was a shortage of 18.7 million housing, of which 99% is from Economically Weaker Section (EWS) and Low-Income Group (LIG) households of the society. The income of these groups are less than INR16,000 per month.

With the support of the Government

The Government is also looking to bring reforms in the affordable housing industry, which is a populist measure and expected to counter the slowdown in the economic growth. Recently, it has revised the income limit of EWS and LIG groups, and allowed ECB in affordable housing. The Government is also looking to introduce several reforms including reduction in stamp duty, granting infrastructure status, streamline the approval process and promote in-situ development.