The Residential segment emerged as the most resilient asset class

Residential real estate

Of all the real estate asset classes in India, the residential segment has, over the past one year, been showing some promise. True, it has been quite a roller coaster ride for the sector — within a year, prices fell by 10-20 per cent in the first quarter, largely due to the Lehman aftershocks, only to revive in the following quarter and then increase by 5-10 per cent in the third quarter — but it has maintained an upward graph overall, thanks largely due to the innovative affordable formats and strategies introduced by developers to suit consumer demand.

Despite the last quarter (Q4, 2009) witnessing a slight slowdown in sales and the Dubai World debt crisis threatening to prolong the process of consolidation, realty experts are confident that the next few quarters would be steady and new launches would offer a better choice to consumers in terms of space.

Key to stability The second quarter of 2009 saw developers implementing innovative strategies to dispose of the accumulating inventory and combat the liquidity crunch.

By this time, the jolts of the past year had altered the dynamics of India’s residential market space — developers got wiser and introduced middle class-friendly affordable housing products.

Luxury projects and exorbitant prices were things of the past. Along with the change in business strategy, there came a general trend of price stabilisation. This was aided by consumer confidence, especially of those who had been sitting on the fence waiting for prices to go down further.

The second quarter also saw developers remarketing luxury projects as affordable ones by reducing price and unit size. Some launched fresh affordable projects minus the frills.

According to Chintan Patel, senior professional, real estate practice, Ernst & Young, “The residential segment has unanimously been voted as the most resilient asset class in the slowdown. This may be because developers resorted to innovative strategies, such as value engineering of apartments, to lower the overall prices, thereby tapping the latent demand in this large midincome segment.”

The first two quarters of 2010 will see prices stabilising. While there would be maximum growth in Tier-I cities, Tier II and III cities will see their own set of demands emerge, Patel adds.

This year started on a discouraging note with sales going down significantly -the aftershocks of the 2008 global credit crunch were still being felt. However, from the third quarter, reduction in prices, softening of home loan rates and an improvement in the economic sentiment brought buyers back to the market. “The activity level in the residential market has improved and I expect this to be sustained in 2010, especially in the affordable market segment,” says Anshuman Magazine, chairman and MD, CB Richard Ellis South Asia Private Limited.

According to Priyankar Bhikshu, associate director, consulting and research, at DTZ, this year marked the transition period in the residential segment. New trends were seen in product mix, development formats, market positioning and value-add components. A majority of developers shifted focus from high-end to mid-end and affordable housing ventures due to the resilience of the latter categories. Banks, too, kept interest rates low to “incubate the demand” in the affordable category, adds Bhikshu.

Unit sizes became smaller with more two-three BHK apartments, averaging at 1,000-1,300 sq. ft, to fit the affordable price bracket.
Further, newer concepts like studio apartments, serviced apartments and individual floors also comprised a sizeable part of the newly launched supply. In all, 97 per cent of the supply since Q1 2009 was in the affordable/ mid-income category. Highend projects constituted only 3 per cent of the overall supply and these were launched at prices much lower than before.
Lessons learnt The slowdown made developers realise that a market slump requires greater alignment with demand dynamics. They now know that the middle-class home buyers’ market has a huge demand. The government, too, has been involved in aiding the realty sector through a series of direct and indirect measures. A series of cuts in key policy rates and the 1 per cent interest rate subsidy on home loans up to Rs 10 lakh (for properties costing not more than Rs 20 lakh) are among steps that helped the recovery process.

The government’s most important direct intervention is expected to come in the form of the Real Estate Regulator Bill. The model bill aims to protect buyers’ interests by ensuring mandatory disclosure of project details and timely delivery.

Residential rates started appreciating in certain locations during the second quarter of 2009, mainly as a consequence of developer optimism. This, at places, led to stock pile-ups — it was a miscalculation of demand, much on the lines of luxury housing.

With the Indian economy showing signs of revival and people again becoming sure of their future earnings, there was a surge in property demand during the JulySeptember period. The number of property searches grew by a whopping 60 per cent to reach 20-35 lakh during this period, points out Aditya Verma, VP & business head,, a realty portal.

Future trends Overall, the residential sector is expected to remain stable during the next six months as developers are likely to maintain prices at current levels to keep buyers interested, says Bhikshu, dismissing fears of another slowdown following the Dubai debt crisis.

“The remittances from Dubai have so far been funnelled into residential real estate india, especially in Kerala and Punjab, but the crisis will have minimal impact on India and would prolong the phase of consolidation of the realty market,” he says.

According to Gulam Zia, national director, research and advisory services, Knight Frank, “The current quarter (Q4) is expected to note at least 30 per cent less transactions than the previous quarter. This may again force developers to re-strategise their price points. So, going forward, we may expect prices to remain more or less steady.”

What is urgently needed now, says Sachin Sandhir, managing director and country head, RICS India, is rationalising and assessing whether developers are actually identifying consumer requirements based on the right parameters. An equally important aspect is the actual delivery of these affordable housing projects as per the timelines and costs committed. However, with tremendous business opportunities within this segment, the future of `affordable housing’ continues to be bright.

Due to the prevalent demand for mid-income housing, more developers are expected to launch new projects in this category over short to medium term. The high-end segment developments are expected to witness further increase in values as the market sentiment begins to show signs of revival.

The last quarter of 2009 will see steady demand and supply. The emerging markets to watch closely are Manesar and Bhiwadi. There is a proposal of New Bhiwadi, which is likely to fuel investments, and that is going to have an impact on the real estate market there