Affordability and upturn: Why it's a good time to strike a property deal

With the aggregate property inventory level expected to fall to the long-term average in 16 months, the window available to you before prices start rising again is limited

The best investments in any asset class are made when there is ‘blood on the streets’, that is, when that asset class is viewed unfavourably by the majority of buyers and investors. The residential real estate market in India still fits the bill. However, you need to act soon before the window of opportunity closes in the not-so-distant future.
 
Early signs of an upturn: Recent numbers show that the worst may be over for the residential real estate market. According to PropTiger’s Realty Decoded report for the fourth quarter of FY18, sales in the top nine cities grew 0-69 per cent year-on-year (y-o-y). Hyderabad was the only exception among these cities, registering a y-o-y decline of 29 per cent. Experts say there are signs of a gradual revival in the residential real estate market. “Inquiries have begun to rise, sales by reputed developers are improving, especially for their ready-to-move-in inventory, and demand for home loans is also picking up,” says Anuj Puri, chairman, Anarock Property Consultants. In a ‘Greed & Fear’ report, CLSA’s chief strategist Christopher Wood too has said that the residential property market in India has finally begun to pick up, after years of oversupply, helped by improved affordability.
 
Growing affordability: An affordability index that housing finance major HDFC (see table) brings out today stands at 3.7, the lowest in more than two decades. “General income levels have improved while property prices have been stable over the past couple of years, which is a rare occurrence,” says Renu Sud Karnad, managing director, HDFC. Lower interest rates have also helped. “Though there has been a minor increase in home loan rates recently, they are still quite low compared to average rates over the past two decades,” says Karnad. She adds that the fiscal benefits and subsidy  provided by the government under the Pradhan Mantri Awas Yojana (PMAY) scheme also help reduce the effective interest rate to less than 4 per cent in case of loans of up to Rs 3 million.
 
Improving confidence: While the latent demand for housing was always there, projects delays on a massive scale, especially in the north, had dented confidence. But that is changing now. Says Karnad: “The intangible benefits which RERA (Real Estate Regulation and Development Act) is providing to homebuyers by enhancing transparency and bringing in more confidence regarding timely delivery of projects is also helping,” says Karnad.

The impact of past disruptions has begun to wane. “The real estate market had suffered multiple disruptions in 2016-2017 due to demonetisation, and then the implementation of RERA and Goods and Services Tax (GST). Those issues have got resolved by now,” says Ankur Dhawan, chief investment officer, PropTiger.com. Another factor at play is the availability of ready-to-move inventory. “Not only do these properties satisfy the impulse for instant gratification, they also give greater comfort to risk-averse buyers,” says Puri.
 
Inventory overhang is gradually getting addressed. “New project launches dipped drastically in 2017 in all cities. Fresh launches have now declined below the absorption level,” says Siva Krishnan, managing director-development solutions, JLL India. At the current rate of absorption, inventory overhang is expected to touch the long-term average level in 16 months.     
 
The recent downturn has also led to developers right-sizing their projects. “Earlier, it was impossible to get a flat in Mulund or Chembur in the Rs 3.5-4 million range. But developers are now offering one room-kitchen units in that range by reducing the size to 200-250 sq. ft,” says Dhawan. The market for such properties is bigger (aided by government incentives).
 
While ready-to-move-in projects were in demand throughout the downturn, now select new launches have also begun to get a good response. According to Krishnan, there is traction for fresh launches now, provided the pricing is correct, location is good, and sizing is reasonable. Buyers who are not so deep-pocketed and would like to pay only the pre-EMI during the construction period are opting for them.
 

Caveats for investors: Bear in mind that the pace of recovery varies from one city to another, and within each city, from one micro-market to another. Hence, the choice of the right location, as always, remains the key. Cities where inventory levels are much higher (vis-a-vis absorption levels) may recover later. Dhawan warns that the luxury segment is still not showing signs of turning around. A good rule of thumb, he says, is to opt for areas where job creation or infrastructure development is happening. Investing on the outskirts could offer gains in the long run provided prices are low and there is a major development trigger. For instance, the Yamuna Expressway area in the National Capital Region could benefit from the development of an airport at Jhewar. Investors should also pay heed to size. Investing in a larger-sized property could be riskier as there are fewer buyers for them. Finally, don’t enter the realty market with a horizon of less than five-seven years.
 
Advice for end users: Property rates are still largely stable at present, and developers are still offering discounts (up to 10-15 per cent) and generous payment options. But prices could start hardening in the near future. “Home loan interest rates have begun to inch up already, so you need to lock in the best deals available now,” says Puri. Focus primarily on the location, quality of the project, and quality of the developer, and don’t compromise on these factors for higher discounts.