Strike a deal quickly as home prices likely to head north in 2021

After a prolonged slowdown, there appears to be a real possibility of an upturn in the residential real estate market in 2021. A recent report from Jefferies says a new cycle could begin this year as both end users and investors reenter the market. It expects inventory to decline to an eight-year low by the end of 2021, and prices to rise 10 per cent plus over the next two years. End users who have been sitting on the fence need to act fast. 

Market may have bottomed out

In 2020, the sale of residential units across the top seven cities fell 47 per cent compared with 2019. However, on the positive side, inventory overhang has reduced 19 per cent from the peak of 2016, according to data from Anarock Property Consultants.       

Developers kept their prices largely stable over the past year, but offered discounts where required. Says Shalin Raina, managing director – residential services, Cushman & Wakefield: “In the southern cities, price discounts were limited to 1-2 per cent as these markets remained correctly priced and were driven by stable economic activity and end-user demand. In other cities, where inventory levels remained high, developers had to offer slightly higher discounts to push sales. But, even there they were not very high. Developers had limited headroom to cut prices as they have been trending down since 2017.”

Outlook improving gradually 

The downturn in residential real estate has been a long one. Average prices across India’s top seven cities appreciated by only 25-30 per cent between 2012 and 2020. “It seems the markets bottomed out in 2020. Demand picked up during the second half of the year, which augurs well for 2021,” says Anuj Puri, chairman, Anarock Property Consultants. He adds that residential real estate prices may begin to improve from the second half of 2021 as demand improves and the vaccination drive picks up pace. “Also, considering that raw material prices, including those of cement and steel, are rising in India, developers could be forced to increase property rates,” he says.

Procrastinating could prove costly

According to Jefferies, affordability is at its best ever in 2020-21. With prices and home loan rates both at record lows, end users should seal the deal at the earliest. “At present, developers are offering many incentives, like absorbing GST (goods and services tax), stamp duty, and registration costs. All those incentives could end as the recovery gathers momentum,” says Subhankar Mitra, managing director, advisory services, Colliers International India.

Now that key structural reforms in the sector have been undertaken, and the markets are bottoming out, investors may re-enter. “They will have to stay invested for the long term as the days of making 2X returns overnight are behind us,” says Puri.

Mitra says investors should focus on investing in a house for rental income rather than capital appreciation, which may accrue only over the long term. “If you qualify, take the benefit of the Pradhan Mantri Awas Yojana. The interest subsidy from this scheme will bring your cost of loan down — close to the rental yield,” he says.

Investors should hunt for properties in areas close to corridors of economic activity. This will ensure a regular supply of tenants and fetch sound appreciation. Engage with large, organised developers only. “The market seems to be in the final stages of consolidation. Financially weaker players are likely to go out of business,” says Puri.