The residential real estate market witnessed a 15 percent year-on-year (yoy) sales growth in FY23 for the top eight real-estate clusters despite pressure from higher input costs, increasing mortgage rates, and domestic and global recession. Recessionary and inflationary pressures could impact near-term demand slightly but the market is expected to absorb the pressure, and demand would pick up eventually, according to an analysis by India Ratings and Research (Ind-Ra), which revised the outlook on the residential real estate sector to ‘neutral’ from ‘improving’ for FY24.
Overall, Ind-Ra expects the sales momentum to continue and housing sales to increase by 9 percent yoy in FY24, supported by steady, healthy demand, it said.
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Housing prices may increase further
Property prices have risen by 8 percent to 10 percent yoy in FY23, and might increase further by 5 percent yoy in FY24. Construction costs have risen 8 percent to 10 percent yoy in FY23, with increased input costs causing the blended costs of developers to go up by 5 percent to 6 percent yoy. However, developers might not hike prices over the next six-to-seven months so as to handle any macroeconomic concerns and wait for the demand dynamics to play out.
Affordability dips in FY23; demand to pick up gradually
Affordability was a prime driver for housing sales in FY22. However, inflation compelled an increase in selling prices by developers, and a series of repo rate hikes of 250 basis points (bps) since May 2022 have challenged demand dynamics in the affordable segment in FY23, while also causing mid and premium-segment buyers to defer their purchases. However, the government’s increasing developmental focus on infrastructure and budgetary aids, such as concessions in tax slabs, would leave higher disposable income in the hands of prospective homebuyers in the middle-class segment, driving home sales over the medium term.
Tier II and III cities expected to report growth
Renewed government focus on developing infrastructure and improving connectivity across new cities are likely to stimulate the development of Tier II and III cities and generate substantial growth. In the Tier II and III markets of Tiruchirappalli, Puducherry and Mangalore, absorption increased by over 80 percent during FY22-9MFY23. Furthermore, absorption in the peripheral markets of Mumbai, Bengaluru and Hyderabad grew at a much higher rate of 53 percent compared to 16 percent in the main markets.
Divergence between Tier I and other players to continue
Ind-Ra defines Tier I players as those having positive brand equity, a large scale of operations, high execution capabilities, strong refinancing abilities and healthy balance sheets. The rating agency expects Tier I players to record a strong operating performance in FY24, given their increasing market share, while some Tier II and marginal players would continue to struggle with poor sales, collections and liquidity.