Tuesday's Talking Points
The Real(ty) Boost to the Indian Economy!
What’s the Point? (A Brief Summary)
Residential Real Estate demand has been picking up, which is evident in the rising count of new launches and sales of housing units. The office market recorded weighted average lease term of 62 months in the last 14 months until February – higher than previous peak of 59 months in 2018 and 2022. The rising tenure of lease transactions is indicative of the rising demand for India’s commercial real estate. Enforcement of regulatory initiatives like RERA (Real Estate (Regulation & Development) Act, 2016), rising per capita incomes, improving housing affordability bode well for the overall realty sector.
Numbers in Perspective
Source: Knight Frank, Jefferies
Long Term Growth Drivers of the Realty Sector
- Regulatory Initiatives bringing transparency to the Sector
Earlier, the structure of the real estate market in India was lopsided, with consumers having limited bargaining power, whereas large builders and developers having the upper hand. The 2000s urban property boom created large excesses – some developers raised substantial funds on the pretext of completing existing projects, and utilised them as equity for new projects. These excesses unravelled post GFC as liquidity tightened, which ultimately dented buyer confidence.
Thus, in order to improve buyer's confidence in the market, the Government introduced the RERA Act in 2016. Some of the key buyer-friendly features of this Act include the following:
- Projects can be marketed only after registration with the State’s Real Estate Regulatory Authority is completed
- Separate escrow account needs to be maintained for each project where a minimum of 70% of money from buyers will have to deposited. Proceeds can only be used for construction of the project and cost borne towards the land
- Buyers’ redressal mechanism including potential refunds with interest and compensation in case of builders delaying possession
Further to such initiatives, to support the rising urban population and address the infrastructural challenges*, the “Pradhan Mantri Awas Yojana – Urban Housing for All Mission (PMAY-U-HFA)” launched in 2015 by the Ministry of Housing and Urban Affairs (MoHUA), saw an allocation of ₹79,000 crore in Union Budget 2023-24 – 66% increase compared to the previous year, which is expected to aid the growth of the sector.
*Affordable housing, access to clean drinking water, electricity, roads, and other sanitary access
- Rising Share of High Income Earners to unlock Potential Residential Demand worth $3.5 trillion by 2047
With upper mid income and high income individuals to constitute 51% of the population by 2030 versus 26% in 2021, India’s changing income pyramid could lead to higher premiumization. A significant share of the population would shift to lower middle and upper middle income categories, and could create significant demand for mid-segment and luxury housing. As per reports, the luxury housing segment has already seen significant growth in the past 2 years.
- Rising Urbanization to aid the Growth of the Realty Sector
As per IMF and MoHUA, India’s development scenario has been characterized by a rapid rate of urbanization, with nearly 36% of total population being urban. As the number of Indians living in urban areas is expected to reach 543 million by 2025 and 676 million by 2035, the demand for urban housing could continue to rise.
Low Inventory Levels – A Short Term Growth Driver of the Realty Sector
The festive push for volumes led to supply rising by ~30% Y-o-Y in the industry during October and November 2023. With the supply broadly aligned with demand, inventories for the Top 7 cities have been declining for the past 3 years. This indicates a better balance between demand and supply than 6-7 years ago and could lead to more investments.
Source: Jefferies, MMR: Mumbai Metropolitan Region
Conclusion
The Realty sector has several structural tailwinds, and is currently witnessing a cyclical upswing after a period of consolidation. A positive environment in the realty sector has positive outcomes for a host of sectors such as construction and infrastructure, building materials, and finance, while also being a large employer of people. With realty forming a large part of the economy and having significant linkages to different sectors, it could drive significant economic growth in the coming decade.
Sources: Knight Frank, Jefferies, India Budget, MoHUA, and other publicly available information
About Tuesday’s Talking Points (TTP): TTP is an effort by HDFC AMC to guide key conversations in the Indian financial markets and investing ecosystem. We aspire to do this by providing relevant facts, along with our perspective on the issue at hand. If you have a topic that you would like to be featured here please write to us at [email protected]
Disclaimer: Views expressed herein, involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied herein. Stocks/Sectors/Views referred are illustrative and should not be construed as an investment advice or a research report or a recommendation by HDFC Mutual Fund (“the Fund”) / HDFC Asset Management Company Limited (HDFC AMC) to buy or sell the stock or any other security. The Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. Past performance may or may not be sustained in the future and is not a guarantee of any future returns. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
