India's residential real estate sector is poised for an upcycle following its best year in more than a decade, during which buyers queued to snap up deals despite rising prices and the highest interest rates since 2018.
Sales of residential units in India's seven biggest cities, often considered an industry barometer, rose 31% to 476,000 units in 2023, the highest on record, according to ANAROCK Property Consultants' annual Indian Residential Real Estate 2023 report. Sales rose 26% over the previous year in the same seven cities, according to Jones Lang LaSalle SAS.
"The driving forces behind the sector growth can be attributed to rapid urbanization of Indian cities, government initiatives ... [and] rising disposable income of the millennials fueling the demand for better quality housing," Abhai Mani Chaturvedi, vice president of research at ANAROCK, told S&P Global Market Intelligence in an emailed interview.
India expects its $3.5 trillion economy to grow 7.6% in the fiscal year that ends on March 31, compared with 7.0% in the previous fiscal year, making it the fastest-growing major economy in the world. The government is spending billions of dollars to upgrade India's infrastructure, building highways and airports as Prime Minister Narendra Modi seeks his third term in power in this summer's national elections. Housing for all and building smart cities with better connectivity are key elements of the government's infrastructure push.
Study of contrasts
The surge in India's real estate sector contrasts with widespread weakness in China, where large developers are debt-laden and have multiple unfinished projects in their portfolio. Analysts believe it will be a challenge for China to meet its 2024 GDP growth target of about 5% amid the weakness in the property market. China's real estate climate index hit an all-time low of 92.130 in February.
Analysts said India has tighter regulation and greater demand from end-users. Still, India's real estate market and the government need to avoid the dangers of excessive debt-fueled development.
"Regulations will likely ensure that big financial lapses as well as collapses are averted or controlled at an early stage," Rohan Sharma, senior director - Research and REIS, JLL India, told Market Intelligence. "Given the free market dynamics here and nearly perfect competition as per economic theory existing in the residential markets, there is less likelihood of over-extended players surviving or being backed, if fiscal management standards are not maintained adequately," Sharma said.
New launches
Launches of residential projects trailed demand for a few years to 2019 as builders cleared an inventory overhang built over prior years. In the last four years, new launches have exceeded sales. Households saved more during COVID-19 lockdowns and the families in the mid- and high-income brackets faced relatively lower income disruptions, pushing up demand.
High interest rates failed to dampen market sentiment, after the Reserve Bank of India raised its key benchmark rate by a cumulative 250 basis points between May 2022 and February 2023.
Interest rates in India are expected to fall in 2024 as the global monetary policy cycle turns, making home loans more affordable. Still, other factors such as loan-to-value ratios, overall borrowing capacity, industry cycle and liquidity are among important factors for banks taking exposure to the real estate sector.
Price increases
Home prices on average increased 15% to 7,080 rupees per square foot in 2023, according to ANAROCK. Knight Frank India's estimate for price increases ranged 4% and 11% in the top seven cities. Demand was stronger in the premium segment. For apartments priced at over 15 million Indian rupees, the share in annual sales increased to 23% in 2023 from 19% a year ago, JLL estimates show, while houses priced below 7.5 million rupees saw a decline.
People queued to buy million-dollar houses in the western Indian city of Pune, and Gurugram, a city next to New Delhi, according to media reports. DLF Ltd. said Jan. 8 that the builder sold 1,113 luxury apartments worth over 72 billion rupees at a new luxury development in Gurugram in 72 hours before the project was formally launched.
Analysts expect prices to rise further.
"In the residential segment, the mid and premium housing segments are likely to move faster still in terms of price appreciation while the luxury segment may see some stability even as the affordable segment by its basic nature of price control will also see prices mostly stagnating," JLL's Sharma said.
As of March 26, US$1 was equivalent to 83.31 Indian rupees.