Expert Speak: Residential outlook resilient amidst emerging headwinds

23 Feb 2023 , 10:35 AM

In CY22, the residential sector has witnessed a strong rebound in sales, although supply was evenly matched, leading to flat unsold inventory levels. Mumbai has seen the sharpest increase in supply during CY22. Moreover, the share of luxury sales has doubled in the last five years, and the average unit sizes have also increased post pandemic. Affordability has tapered off, but remains attractive. Outlook on commercial is marred by weak leasing demand and adverse impact on REITs, due to recent budget announcements. Retail malls are witnessing strong consumption and rental growth.

Strong rebound in Industry demand in 2022; supply also catching up

CY22 witnessed a strong pickup in Residential demand (+54% YoY) with sales (in units sold) surpassing the 2014 levels. The top seven cities of India witnessed 30-90% YoY growth. In value terms — of the ~Rs3.3 trillion sales across the top seven cities — MMR led with 48% share, followed by NCR (16%) and Bangalore (11%). However, the launches too witnessed a rebound with 51% YoY growth, led by MMR (+119% YoY) and followed by Bangalore/Pune/Hyderabad at +61/61/32% YoY respectively. Analysts at IIFL Capital Services note that sales and launches were evenly matched for 2022, resulting in flat YoY inventory levels. However, with improving demand, the inventory overhang witnessed a steep decline from 32 months in CY21 to 21 months in CY22.

Key Trends – Share of Luxury sales doubled; average unit size increasing again

As per ANAROCK, some of the key interesting trends were: 

• Share of High-end and Luxury sales (ticket size of >Rs 8 million/unit) for 2022 doubled from 2018 (from 20 to 39%) and the share of Affordable (ticket size <Rs4 million) has halved to 20% from 40%.
• Industry consolidation is clearly underway, with the share of leading listed and unlisted developers now at 31% in H1FY23 versus 17% in FY17. 
• Buyer profile too has undergone a shift with 31-45-year segment forming majority of demand (versus 46-60-year segment earlier).
• Average unit size declined from 2013 till 2019, but increased after the pandemic over CY20-22. 
• At 0.4 million units (+43%), completions too were at an all-time high in CY22.

Residential – Outlook resilient amidst emerging headwinds

Anuj remains bullish on Residential demand as overall affordability remains attractive, despite a steep increase in mortgage rates over the last one year. However, buyer sentiments could get impacted if inflation went unchecked. He believes supply levels will be calibrated and developers may focus on execution, keeping the overall inventory levels in check. A price appreciation of 5-8% is likely, mainly led by large and listed developers. The demand is now clearly led by end users versus higher share of speculators in the previous cycle, he believes.

Commercial – Near-term headwinds

ANAROCK believes CY23 will see leasing demand shrinkage of 10-12% amidst the looming recession, as Global captives, IT companies and US-based companies are expected to slow down. Vacancy levels are likely to go up from the current 16% to around 18-20% — largely driven by Hyderabad and Chennai. Anuj sees a recovery in leasing demand only post Q4CY23. Rentals too are expected to remain stagnant, except for Pune and Bangalore. Further, the recent change in REITs taxation in the Budget is a negative for both REITs and Invits, with Invits likely to be hit harder.

Retail – Robust growth outlook

Unlike offices, ANAROCK is bullish on retail malls where they see strong growth across consumption and rentals. Grade-A malls are thriving with an average 97% occupancy. Developers and retailers are both looking to expand their portfolios. In the post-pandemic period, sales in the top 10 malls have increased 28% (over three years), and mall/high street rentals have risen by 15/20%.

IIFL View – Listed developers set for another strong year of growth

While there has been some demand softness observed in the Affordable segment, listed developers have not seen an impact on footfalls/enquiries so far. FY23 is on track to deliver ~25% YoY growth in pre-sales, over and above ~50% growth in FY22. Q4 pre-sales/launches are expected to be robust. Analysts at IIFL Capital Services believe developers with a deep pipeline from well-located land bank, healthy margins and low leverage are the best placed – DLFU, BRGD and LODHA are their top picks.