Developers sitting on unsold inventory worth INR 370,000 crore
· The sales of residential units decreased by 29% in Q1 2020 over the same period last year
· Q1 2020 recorded new launches of 40,574 units, an increase of 3% compared to Q1 2019
· Mumbai and Bengaluru continued to dominate new launches and formed nearly 60% of the overall launches during Q1
· However, new launches in Mumbai witnessed a substantial decline of 18% compared to the same period last year
· New launches remained largely unchanged in Bengaluru (increase of 3%) and Delhi NCR (decrease of 3%)
A rebound in India’s residential property market will be influenced by the intensity, spread and duration of the COVID-19 pandemic. Government stimulus measures and monetary policy adjustments by the Reserve Bank of India (RBI) will further mitigate the adverse effects of the pandemic and help steady consumer confidence in the residential property market, according to the ‘India Real Estate Market Update Q1-2020- Residential’ released today by JLL, India’s largest real estate consultancy firm today.
The homebuyer community deferred their purchase decisions due to the evolving COVID-19 outbreak, which led to sales declining by nearly 30% in Q1 2020 on a y-o-y basis. “The impact of the ongoing pandemic on business activities became more prominent since the beginning of March 2020 in the country” adds the report.
However, even though new project launches came to a standstill in March, Q1 2020 witnessed a rise of 3% in new launches as compared to the same period last year. Q1 2020 recorded new launches of 40,574 units compared to Q1 2019.
“The COVID-19 pandemic is expected to weaken GDP growth, which is expected to fall below 5% in FY 19-20 and potentially reach 2008-09 levels in FY 20-21. However, the residential real estate market appears to be at an advantageous position today as compared to the Global Financial Crisis, led by a series of structural reforms by the government in the past five-to-six years,” said Ramesh Nair, CEO & Country Head, JLL. “When the COVID-19 scenario stabilises, factors such as better-priced deals, enhanced financial health of banks and greater demand from end users will aid in improving buyer sentiment. Sales are expected to regain some traction towards the end of 2020 supported by the festive season during that period,” he added.
Owing to the economic slowdown as a result of the current situation, consumer confidence has also taken a massive hit, which is having a direct implication on the home buying decision process.
Lower mortgage rates, combined with other measures taken by the government to improve sentiment, is expected to arrest this declining trend. These factors will further aid in the recovery of the residential market in India.
Subdued sentiments weigh in on the offtake of home loans
Source: RBI, JLL Research
Note: Data pertains to housing loan disbursals by commercial banks
Developers have locked-in capital of INR 370,000 crore
The first quarter of 2020 witnessed an increase in unsold inventory as launches outpaced sales by a significant margin. Unsold inventory increased from 442,228 units in Q4 2019 to 455,351 units in Q1 2020. Moreover, Mumbai surpassed Delhi NCR to become the market with the maximum quantum as well as value of unsold inventory.
Mumbai accounts for majority of the locked-in capital
Source: Real Estate Intelligence Service (REIS), JLL Research
Note: YTS (years to sell) denotes the number of years required to offload the unsold inventory
Across the top seven cities, developers are sitting on an unsold inventory worth INR 370,000 crore at the end of March 2020.
An assessment of years to sell (YTS) reveals that the expected time to liquidate this stock has increased marginally from 3.2 years in the last quarter of 2019 to 3.3 years in Q1 2020. With anticipated slower sales in the coming quarters, the time to sell is likely to increase significantly.
“Thus, the duration to monetise the existing inventory of around 455,000 units is expected to extend. Resultantly, developers will have to sit on this unsold inventory worth INR 370, 000 crore for a relatively longer duration. Having said this, the RBI’s intervention to provide a 3-month moratorium on all term loans by financial institutions will alleviate short-term liquidity concerns and help developers survive in these uncertain times,” the report notes.
New launches continued, developers focus on mid and affordable segments
The current quarter saw a modest increase of 3% in new launches of residential units on a y-o-y basis. The healthy streak in launches in the beginning of the quarter was dampened by the growing concerns of the impact of COVID 19 on the real estate business starting in early March. The market gradually slowed down in the beginning of March before it came to a standstill, on account of the nationwide lockdown.
Marginal growth in new launches
Y-o-Y Growth 2019 (%)
Note: Top 7 cities include Delhi NCR, Mumbai, Bengaluru, Chennai, Hyderabad, Pune and Kolkata
Source: Real Estate Intelligence Service (REIS), JLL Research
Mumbai and Bengaluru continued to dominate new launches and formed nearly 60% of the overall launches during the quarter. The overall increase in new launches was driven by smaller markets like Pune, Kolkata and Chennai. While new launches in Mumbai witnessed a substantial decline of 18%, as compared to the same period last year, it remained largely unchanged in Bengaluru (increase of 3%) and Delhi NCR (decrease of 3%), according to the report.
“New launches witnessed a modest 3% increase in Q1 2020 y-o-y, even though businesses hit a grinding halt in March 2020. Homebuyers deferred their purchase decisions in light of the current situation, resulting in an almost 30% y-o-y dip in sales during the first quarter of 2020. With the anticipated slowdown in economic activity, the real estate sector, which contributes 8% to the Gross Domestic Product of the nation, is poised for some immediate challenges,” said Samantak Das, Executive Director and Head of Research, REIS, JLL.
The crisis is likely to aggravate the liquidity crisis faced by developers and restrict new launch to a minimum even after normal business conditions are restored. In the subsequent quarters, developers are expected to focus on completion of under-construction projects and clearing their unsold inventory. Moreover, consolidation in the residential market, with an increasing number of joint developments, will continue to be a major trend with the size of pie belonging to reputed developers increasing consistently.
Development focus on mid and affordable segments continued in Q1 2020, as developers continued to capitalise on the demand and supply side incentives of the government, to cater to the unmet demand in the lower and mid income groups and target first time homebuyers. A closer analysis of launches during the first quarter of 2020 shows a sizeable proportion of 62% in the affordable and mid-priced segments
Looking back to look ahead
In the first half of the month, walk-ins reduced by 50% and buying discussions at advanced stages were being deferred. At present, with a nationwide lockdown imposed, launches and sales have come to a standstill. The economy is facing a slowdown and the uncertainty regarding the future is increasing. In such a scenario, it is difficult to provide a detailed, quantitative assessment of the COVID-19 impact on the future of residential real estate market. However, a look back at some past unprecedented disruptions to the economy could provide an indication of the expected outcomes.
The Global Financial Crisis and the announcement of demonetization were a drag on the Indian economy. While the GDP growth toppled from 7.7% in FY 2007-08 to 3.1% in FY 2008-09, it has been on a declining trend since the demonetization move in 2016-17 (Figure IV). These events impaired economic growth and had far-reaching effects across key industries including real estate.
GDP growth has been on a declining trend since demonetization
Source: RBI, JLL Research
Note: FY 2019-20 is expected to register a lower than 5% growth due to the Covid-19 pandemic
The COVID-19 pandemic will have a similar impact on GDP growth, which is expected to fall below 5% in FY 19-20 and could even reach 2008-09 levels in FY 20-21. However, following a series of structural reforms by the government, the residential real estate market appears to be at an advantageous position today as compared to the 2007-08 Global Financial Crisis
Residential market scenario
Global Financial Crisis
Valuation of residential properties
Nature of the market
Home loan rates
Ability of banks to lend
Higher due to sound financial position and presence of security as well as RBI’s efforts to infuse liquidity
More tax benefits for developers as well as buyers introduced by the government in the last 4-5 years
Relatively less because of lower demand from investors
Across different price segments, with focus on high-end to luxury
Affordable and mid-segment housing, which is more in sync with demand
Source: JLL Research
Unlike in the past, the government has also been prompt in announcing various stimulus packages. The RBI has also played a vital role by slashing repo rate by 75 bps, bringing down the current rate to 4.4% in addition to other measures to infuse liquidity.
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management, headquartered out of Chicago. A Fortune 500 company with annual revenue of $16.3 billion, JLL operates in over 80 countries and a global workforce of more than 93,000 as of September 30, 2019. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, please visit jll.com.
In India, JLL has an extensive presence across 10 major cities (Mumbai, Delhi NCR, Bengaluru, Pune, Chennai, Hyderabad, Kolkata, Ahmedabad, Kochi and Coimbatore) and over 130 tier II & III markets with a cumulative strength of close to 12,000 professionals. Headquartered out of Mumbai, we are India’s premier and largest professional services firm specializing in real estate. Our services cover various asset classes such as commercial, residential, industrial, retail, warehouse and logistics, hospitality, healthcare, senior living, data centre and education. For further information, please visit jll.co.in
Thanks, you can explained this well …...
Post a Comment