Minor revival in real estate sector is reassuring

Investors will be pleased to learn that the dismal scenario in the real estate sector is undergoing substantial transformation and an end to the gloomy sales performance appears to be in sight.

After taking repeated beating over the last few years in terms of units sold, it finally dawned upon the developers that something noteworthy had to be done to reverse the alarming downtrend.

Let us begin by talking about how the residential market has fared until now. Post 2010, the sales plummeted steadily, prices started spiralling downwards and investors' interest in properties began waning remarkably. With every passing year, the residential market took a nasty hit.

This was due to a multitude of reasons. Primarily, the markets began to factor in a reasonable degree of risk-weight for the financial situation of developers. Furthermore, the astronomical real estate prices rendered it impossible for the end-users to afford properties. Additionally, the implementation of Benami Transactions (Prohibition) Amendment Act, 2016, Real Estate Regulatory Act, 2016 and demonetisation added to the already mounting list of woes.

Developers began focusing on pricing alignments and product alignments. As a result, the price-to-income multiple reduced from a high of 11x in Mumbai to 7.2x towards the end of 2018, thereby correcting nearly 400 basis points.

The developers have shifted from the luxury and premium segments to creating stocks in the affordable category. Based on the Real Estate H2-2018 Update, around 60 per cent of the apartment stock is now developed under the sub-Rs 50 lakh bracket. Consequently, sales improved for the first time in seven years by 6 per cent in 2018 over those recorded in 2017.

Although 6 per cent seem like a paltry figure, it is still an achievement as it arrested the downward trend. Although it remains to be seen whether the growth will be sustainable, it has created some much-needed positive sentiment in an otherwise subdued environment.

Furthermore, the liquidity crisis in the NBFC sector dampened the real estate sector significantly in 2018. Had it not been for this development, the real estate industry would have certainly clocked better growth.

Needless to say, the impending general elections will have an impact on the real estate sector. Also, the interim budget presented some favourable changes that benefited the industry.

Moreover, the RBI stepped in to reverse the rising interest cycle by scaling back the rates twice by 25 bps each. The GST on projects under construction was reduced considerably by the GST Council.

Although this presents an improved outlook on the sector; not everything is hunky-dory just yet. The after-effects of the NBFC crisis are still lingering on. Buyer interest is also clouded and will become clearer once a stable government assumes office at the Centre.