Real estate sector in the middle of a growth cycle: Motilal Oswal

Despite the price hikes, affordability improved across markets as income growth surpassed pricing growth, which should keep momentum intact in demand and pricing, the report stated

The Indian real estate sector is currently in the midst of a seven- to eight-year-long growth cycle. As a result, the momentum in demand and pricing is expected to continue, according to brokerage firm Motilal Oswal.

“While the National Stock Exchange Nifty Realty Index has doubled in the past year, its returns since January 2022 (two years) have been 80 per cent, similar to pre-sales or cash flow growth for the top 12 listed players. Thus, the recent run-up has just been the catch-up, and future growth is yet to reflect,” Motilal Oswal said in a report.

Despite the price hikes, affordability has improved across markets, as income growth has surpassed pricing growth. This should keep momentum intact in demand and pricing, the report stated.

“Further, the demand revival in the affordable segment, macro tailwinds amid rising per capita income, and scale-up in demand in cities like Bengaluru, National Capital Region, and Chennai can further increase absorption beyond the previous cycle’s peak,” it added.

Supply grew 7 per cent year-on-year (Y-o-Y) to 350,000 units in 2023, marginally above demand, keeping inventory levels in check (inventory overhang of 17 months). As a result, realisations increased by 6 per cent Y-o-Y. Despite price increases, the affordability ratio witnessed a marginal 100-200-basis point improvement in India’s top eight cities, as income growth surpassed pricing growth and mortgage rates remained flat.

Real estate consultancy firm Knight Frank’s numbers suggest that residential sales in the top eight cities grew by 5 per cent Y-o-Y to 330,000 units in 2023, matching the 2013 run rate but 9 per cent below the peak sales of 360,000 units clocked in 2012.

Real estate consultancy Anarock and analytics firm PropEquity reported that real estate absorption in 2023 surpassed its previous cycle’s peak.

According to Anarock, absorption in the top seven cities was up 30 per cent at 470,000 units.

According to PropEquity, it is estimated to have increased by 15-16 per cent in calendar year 2023 (CY23) to 510,000 units.

Thus, on a blended basis, industry volumes grew by the mid-teens in CY23 with 6 per cent pricing growth, resulting in a healthy 20 per cent value growth. Organised listed players anticipate a 30 per cent Y-o-Y pre-sales growth in 2023-24, fuelled by ongoing consolidation.

As indicated by Anarock and PropEquity, housing demand in the top seven cities exceeded the previous cycle’s peak, but Motilal Oswal believes that few triggers in place can lead to a further uptick in demand.

First, the affordable segment, which contributes 29 per cent of total absorption, has been most impacted by the hike in mortgage rates. The decline in interest rates will lead to a revival in affordable housing demand. Further, the government is expected to provide incentives for affordable housing, which would be a key positive trigger.

Second, the rise in per capita income above $3,500 ($2,400 as of CY23) would be a key trigger for the increase in homeownership, as seen in China between calendar years 2008 and 2015.

“These factors could build a sustainable uptick in demand over the next three to four years. Inventory is yet to see a major uptick, while prices have increased by 14 per cent on an absolute basis in the past two years, compared to 25-70 per cent in the previous two cycles, indicating the sector is in the middle of an upcycle. We believe that the existing demand-supply balance, low inventory, favourable affordability, and gradual price hikes should keep the momentum intact for at least three to four years,” Motilal Oswal said in its report.

On the back of continued demand traction, CY23 was the best year ever for residential sales as volume grew by 5-10 per cent, according to various property consultants. Motilal Oswal expects volumes to clock a similar growth rate and a steady 4-6 per cent price hike, implying that sales value in top cities could grow by 10-15 per cent soon.

“While industry sales have hit a decadal-high level, few key markets are yet to catch up with their historical run rates. These factors, coupled with a potential revival of the affordable housing segment, could contribute to industry growth over the next few years. Listed players have outperformed the industry since calendar year 2019, and we expect the trend to continue, given the strong cash flows of large developers and investments in building the project pipeline,” the report said.