In 2012, high interest rates coupled with sticky inflation continued to exert pressure on residential real estate demand as potential buyers chose to remain in a wait-and-watch mode. As a result, the number of transactions across 10 major cities (Mumbai, National Capital Region (NCR), Bangalore, Kolkata, Chennai, Hyderabad, Pune, Ahmedabad, Chandigarh and Kochi) either remained stable or declined from the 2011 levels. Developers also reacted to the sluggish conditions by going slow on new project launches.

Average prices of 2012 in these cities were marginally higher by 3-5 per cent as compared to the average prices of 2011 and the growth was seen primarily in the latter half of 2012.

Overall absorption of residential units across these 10 cities declined by 6 per cent year-on-year in 2012 but this is likely to change in future on the back of a reduction in interest rates and an expected improvement in macro-economic conditions. We expect demand to improve gradually in 2013 and 2014, which will enable a 5-7 per cent year-on-year growth in absorption levels in 2013 and another 6-8 per cent growth in 2014.

Around 840 million sq. ft. is likely to get absorbed across these 10 cities during this period, of which NCR and Mumbai will account for nearly 58 per cent, given the considerable size of the residential markets in these regions.

As far as residential supply in these cities is concerned, nearly 2.1 billion sq. ft. is planned of which NCR and Mumbai alone are expected to account for 43 per cent and 13 per cent, respectively. However, Crisil Research expects only 67 per cent or around 1.4 billion sq. ft. to come up by 2015, taking into account the long gestation periods of large developments and delays in project execution on the back of lacklustre demand and approvals.

Of the total planned supply, nearly 52 per cent is targeted towards the middle-class with an average apartment priced between Rs.20 lakh and Rs.60 lakh.

An improvement in demand across the top 10 cities is expected to enable a 6-7 per cent year-on-year growth in average prices in 2013 and another 7-8 per cent in 2014. Residential prices in 6 out of 10 cities, (excluding NCR, Hyderabad, Kolkata and Kochi), have already crossed their peak levels seen in the first-half of 2008 (prior to the sub-prime crisis and the subsequent decline of real estate prices).

In 2013 and 2014, among the top 10 cities, Pune, Hyderabad and NCR are expected to see the maximum growth in prices. We believe that average residential prices in Pune will grow at a compounded annual growth rate (CAGR) of 9 per cent till 2014, vis-à-vis 2012 levels. Growth will be driven by factors such as Pune’s proximity to Mumbai and the relatively affordable rates, and upcoming infrastructure such as the metro rail and an international airport at Rajgurunagar.

In Hyderabad, subdued demand and the uncertain political scenario, due to the deadlock on the Telangana issue, have resulted in average residential prices bottoming out. Given the limited upcoming supply, we expect average prices to grow at a CAGR of 10 per cent from 2012 to 2014.

With the resolution of the Noida land acquisition issue, and revival in demand from the IT/ITeS (IT-enabled Services) sectors, particularly in Gurgaon, average prices in the NCR will grow at a CAGR of 8 per cent till 2014, vis-à-vis 2012 levels. In Mumbai, huge pent up demand and anticipation of infrastructure development such as metro rail and mono rail will lead to an 8 per cent annual growth in prices during 2013 and 2014.

With only gradual improvement expected in the macro-economy and sentiments, developers will have to resort to innovative methods to push sales. Given the reduced affordability due to higher interest cost and high property prices, developers/financiers will have to offer novel payment schemes to attract buyers, in addition to freebies/pre-launch discounts. No-frills housing may be a way to boost sales.

The government has taken some steps in the Union Budget 2013-14 to help revive the housing market but it has limited room due to fiscal constraints.

So, the onus is on the developers to be more proactive and come up with newer ways and means to lure potential buyers and reinvigorate demand.

The author is Director, Crisil Research, a division of Crisil

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