Residential real estate demand may pick up in the medium-term following improvement in end-user participation on rising affordability, increasing launch of units with mid-income ticket sizes and implementation of RERA, according to a report.
Resolution of the recent liquidity issues in non-bank finance companies (NBFC), however, would be key, Crisil Ratings said in a report.
In the short term, demand is likely to remain muted and prices will remain under pressure on account of slowdown in volumes due to on-going liquidity concerns.
As of FY19, affordability in most cities is estimated to be in the range of 6-8 times compared with 11-13 times five years back, it said.
Ticket sizes, it said, have been coming down as developers launch units with reduced average area per house, led by both market needs and the impetus to affordable housing, it said.
The capital values in the residential segment have been under pressure of late, with a decline of 5-20 per cent across micro-markets in the last 2-3 years, and are likely to remain range-bound because of unsold inventory, it added.
Implementation of Real Estate (Regulation and Development) Act, 2016, (RERA), is also expected to give a fillip to demand, which has been lacklustre so far.
With most RERA websites operational and a grievance-handling mechanism in place in key states, end-user participation is expected to improve gradually for under-construction properties as well, the report said.
"Between fiscals 2019 and 2021, residential demand is estimated to log a compound annual growth rate of 4 per cent led by key micro-markets of Bengaluru, Hyderabad and MMR. Though marginal, the growth will be driven by first time buyers eyeing units in mid-income tickets typically priced between Rs 2.5 million to Rs 10 million," Crisil research director Rahul Prithiani said.
Meanwhile, the report said the commercial portfolio is seeing steady lease rentals and healthy demand, with a good number of assets changing hands.
With large private equity firms and property managers on the prowl, just 15 of the larger marquee deals over the last five fiscals have totalled around Rs 300 billion.
This has helped cushion the blow for developers, who have been refinancing and taking on more debt for construction as residential demand remains tepid.
With limited incremental funding to the sector from banks, which grew at just 2 per cent in fiscal 2018, NBFCs and HFCs came to the developers' rescue.
However, given the current pressure on liquidity for NBFCs, a potential cascading effect on select projects and developers, could make access to funding more difficult.
For the top 20 developers alone, support extended to the residential segment from their commercial portfolio has totalled around Rs 330 billion in the last three years, both through sale of assets and additional top-up debt in operational properties.
These developers account for 90 per cent of the market capitalisation in the real estate sector and have more than 650 million square feet under development.