Realty index likely to build on gains in the near term

There is consolidation in the real estate market, resulting in speculative trading action in the stocks of listed developers. Over the past two fiscal years, the market share of the top 10 listed realtors has risen to about 22 per cent of the real estate market, up from around 16 per cent in 2018-19.

In addition, low interest rates have created demand while allowing companies to deleverage. The balance sheets of the larger developers have improved, with aggregate net debt coming down by over 25 per cent in 2020-21. Low interest rates also translate into lower EMIS for mortgages, and this has created some demand.

There has been inventory liquidation and consolidation, with larger developers taking over projects initiated by smaller realtors who have suffered distress. There are high levels of bookings and pre-selling in units expected to be delivered between 2021 and calendar 2024, indicating that a supply overhang is limited.

The base effect of the poor Q1 2020-21, due to the lockdowns last year, is expected to push up sales growth in Q1 2021-22. Estimates suggest that this could lead to 90-95 per cent revenue growth in Q1 2021-22 year-on-year over Q1 2020-21. Residential sales were at around 50 per cent of precovid levels in June 2021, and volumes may recover to precovid levels from the second half of 2021-22.

The recovery is in a nascent stage. Surveys indicate developers are facing labour shortages; the under-capitalised developers are facing issues in servicing existing loans; construction costs (such as the cost of materials like cement and steel) have increased.

Demand for long-term, bigticket assets cannot be driven purely by lower EMIS, given a situation of high unemployment and low growth. This demand would not be sustainable unless there is a strong growth recovery over the next two-three fiscal years.

GDP is expected to grow quickly over the next two fiscal years. But growth must come hand-in-hand with reemployment. By analogy with the US housing boom, there may be a “K-shaped” demand curve, where high-end real estate continues to see demand, but there’s less interest in lowerend affordable housing.

Mortgages are long-term instruments and sooner or later interest rates will rise. Then, realtors could see demand tapering off, and we may even experience mortgage defaults unless growth recovery takes place along the expected lines.

Another factor suggests investors exercise some caution: Demand for commercial real estate has been affected by the enforced work from home (WFH) paradigm shift. Although there are signs of recovery, this segment is likely to see a long-term down-shift in demand. Many corporates will cut back on space occupancy, given that WFH has helped in cost-cutting without commensurate loss of productivity in many industries.