Rising rates may result in moderation in home sales growth: JLL India CEO

The increase of 190 basis points (bps) in the repo rate resulted in a surge in mortgage rates with a transmission of 130-140 bps in the effective home loan rates: Radha Dhir

Real estate industry is facing a double blow with the rising interest rates and a slowdown in infotech industry that is expected to negatively impact office leasing. Radha Dhir, chief executive and country head, India, JLL (international property consultancy), shares her views on both residential and office property markets in the country, and the outlook for them in an interview with Raghavendra Kamath. Edited excerpts:

Why do you think residential sales have boomed in the January-September period?

This has been due to a combination of factors like changing dynamics around home ownership and Covid-19-induced need to have one’s own safe space. The affordability synergies brought on by 15-year-low interest rates, stamp duty rebates across different states, lower circle rates, and offers by developers in terms of discounts and other payment plans made home ownership easier. Recovery of domestic economy and relative stability in the job environment, along with some salary hikes, has influenced home-buying decisions. The strengthening demand is visible across different price categories, underpinning the fact that demand is more broad-based and driven by fundamentals.

With interest rates going up, do you expect headwinds for residential real estate after the festival season?

The increase of 190 basis points (bps) in the repo rate resulted in a surge in mortgage rates with a transmission of 130-140 bps in the effective home loan rates. It has created some challenges to the affordability synergy prevailing around six months ago.  However, the interest rate after this hike would still remain below what the homebuyers had to pay eight-to-nine years back. Besides, developer discounts, increasing loan tenures by banks to keep EMIs steady, and the expectation of this being a temporary cycle that may change over the course of the home loan tenure, should keep the home buying sentiment reasonably intact. We believe that home loan interest rates inching towards nine per cent and above may result in the moderation of housing sales growth in the medium term.

With the slowdown in IT, do you expect any slowdown in the leasing of offices in the coming quarters?

There is some sluggishness visible in corporate decision making given the prevailing global headwinds. Global firms are likely to look for direction from their corporate headquarters while Indian IT firms will look at real estate planning against factors like business growth, margin impacts due to the global business sentiment, and dollar hedging costs. This is amid the evolution of hybrid workplace strategy. There may be some temporary delays in real estate strategy execution, however, we continue to see a robust space demand pipeline that remains intact and gives us confidence in the long-term prospects of the Indian office market.

How is the co-working segment doing in terms of business growth and leasing?

The flex/co-working segment has been on a growth curve and has clocked a strong performance in the past nine months. In fact, flex operators have leased around 6.6 million square feet (mn sqft) in the nine months of 2022, already making this the strongest year since 2019, which saw flex operators lease 10.4 mn sqft for the full year. In terms of enterprise leasing of flex seats, the nine-month flex seat take-up is already at an all-time peak of 95,000 seats, with the year likely to end with more than 120,000 seats. The annual flex seat take-up in 2022 alone is likely to equal or surpass the combined total of the pre-Covid years of 2018 and 2019, as well as the past two years, i.e., 2020 and 2021.

How is the warehousing sector doing in terms of leasing? What is your outlook for the segment in 2023?

The Indian warehousing sector has shown a robust recovery since the pandemic and significant growth has been registered in H1 2022 (January to June) with the leasing of around 20 mn sqft. It is expected to reach an all-time high of 42-43 mn sqft by the end of 2022. The logistics players have been spearheading the demand, while the e-commerce sector has gone slow this year. Considering the current global economic scenario and the early speculations of the downturn, the demand in 2023 is expected to be mellowed down with a year-on-year (YoY) growth rate of 5-6 per cent.

What are the new trends you are seeing in buying of residential properties?

While sales touched new highs, the buyer today is much more cautious and conscious of doing the due diligence. The residential market’s inherent strength and the rising importance of home ownership will continue to lead to growth momentum. During the festival season, both launches and sales are expected to see an uptick. Apart from the affordable and mid-level segment, the premium segment is also expected to see good traction in projects backed by established developers in prime locations. There is a definite and visible shift in the preference of buyers for developers with a proven track record and this will help increase transparency in the market. This could further lead to boosting the next phase of growth for the industry. Today the buyers are doing their recce thoroughly before buying into a project, and we see that trend continuing.

How do you think developers are reacting to rising interest rates?

At this point, with rising interest rates and the pressure on the central bank to keep inflation under check, we do not believe there can be an immediate solution for the developers. One cannot deny the fact that the cost of funds will and is going up, and thus cash flows will be crunched. The home loan interest rate in the last six months has gone up by around 130-140 bps. Moreover, the residential price is facing upward pressure due to cost-push inflation.

However, to make it a little easier for buyers, developers can explore certain subvention schemes which, currently, are pain points for the buyers. They can also take the interest burden on themselves till the project is delivered. Some states are exploring a decrease in stamp duty to bring back some good cheer to the market. What I also feel developers can do is work with and design a solution with banks and financial institutions offering a varied/flexible rate of interest for home loans according to market segmentation between affordable, mid, and premium segment. This will be in place of a flat rate for all segments. A buyer in an affordable segment can, therefore, look at a slightly lower interest rate compared to mid or premium segments. This will enable Tier I developers who have a portfolio consisting of all segments to have better liquidity.