CHANNAI: The economic downturn in the year 2013 has had an adverse impact on various sectors and the realty sector has not been insulated by these changes. The year has been one of guarded optimism and the sentiments were rather cautious from both investors and builders.
As Suresh Krishn, Secretary, Credai and MD, Isha Homes, puts it, 2013 has been the most challenging year in Chennai realty. “There was a slowdown in the micro markets. Lots of adjustments have been happening between demand and supply. The developers have strategically slowed down the pace of construction of many projects to ensure occupancy and this slowdown is mainly because of the sentiments prevailing in the market. People have lost confidence in the economy and there is policy paralysis. But I hope that one year of pent up demand will find expression in the next year, post elections,” says Suresh.
The year 2013 was indeed a mixed bag, with the scenario changing from quarter to quarter. “The market was really good to begin with and also was growing through the first and second quarter, growth slowed
down and became stagnant throughout the third and the fourth quarter. The last quarter saw a dip in sentiments due to the overall economic slowdown. Towards the end, the appointment of a new RBI governor and the election results in the northern states seem to have kindled the hopes of a revival of the economy,” says R Kumar, CEO, Navin Housing.
The poor scene at the job market, weakening rupee and inflation caused bottlenecks at the buyers’ end. “This reflected visibly in the Indian consumer confidence index, which has been falling consistently over the last three quarters. Despite this, residential property prices continued to exhibit upward movement even as the weakening rupee steadily eroded purchasing power,” says Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India. “While the India’s gripping urbanisation growth story has been fascinating for global investors so far, an underlying truth gradually emerged in 2013 – economic growth, the consumption story and property prices may not rise consistently, and there could be intermittent hurdles or growth risks. The presently cautious market sentiment is likely to continue, as headwinds to growth will prevail at least until the first half of 2014.”
The scene was similar in the commercial property market as well. “Compared to commercial space, residential property has done much better. But having said that, the last two quarters saw improvements in the leasing of office spaces. However, as far as residential real estate is concerned, we have bucked the general trend as our revenues recorded 190 percent growth from the previous. That way it has been a very progressive year. We also had two grand launches during this year,” says Kumar.
The vacancy rate for the year also grew over the previous one. “Vacancy rate for 2013 signs off at around 18.2 percent, rising from 17.4 percent, as of end of 2012. Hyderabad and Delhi-NCR were the biggest contributors in terms of vacancy levels. This was largely due to increased new supply as against a fall in absorption. On the other hand, the heavyweight cities of Mumbai and Bangalore witnessed marginal fall in vacancy. Both these cities saw reduction in the growth of new stock supply, while absorption of office space recovered,” says Anuj.
Anshuman Magazine, CMD, CBRE South Asia Pvt Ltd, feels that against the current economic and political backdrop, demand for commercial real estate is likely to remain subdued in the medium term. “From the perspective of commercial office space alone, demand declined during the third quarter of 2013, because corporates focused on consolidating and downsizing their space portfolios or relocating to peripheral markets. Corporates are expected to continue their focus on optimal space utilization and cost-cutting measures and transaction activity is expected to be mainly restricted to small and medium sized space. Supply backlogs are likely to exert pressure on rental and capital values as well,” he says.
However, the year did not come to an end without signs of a revival. “An emerging economy is never short of opportunities, and it is time that the Indian residential real estate industry realises where the opportunity lies. To date, the shortage of homes in India stands at around 19 million units, and 95% of this housing shortage is in the Economically Weaker Section (EWS) and Low Income Group (LIG) categories. Therefore, pan-India residential real estate prices are likely to grow at 10-12 percent, factoring in input-cost inflation and a gradual pick-up in demand. The risk to this growth estimate is largely on the upside, considering that post-elections, a great deal of uncertainty which currently exists will be put to rest.”
The monsoons this year have also been satisfactory in most parts of the country and this augurs well for the economy. ” This year’s healthy monsoon points to strong agricultural production. This is a boon for food prices, the key contributor to the recent inflation pick-up; and augurs well for weakening of inflationary pressures in the future, possibly leaving scope for monetary softening,” says Anshuman.
Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield, feels that global corporates will remain invested in India with cautious optimism. “Rationalisation of real estate portfolio will be the key to driving office space absorption for majority of 2014. The office market will remain largely an occupier market with rental values in major office location remaining stable. Whilst funds are mainly investing in leased office assets, developers are also offering assured returns models to HNI clients for strata sales of vacant or under construction offices to generate liquidity in markets such as NCR and Mumbai.”
The general election happening next year is being looked at as a likely turning point for the economy. But Anshuman feels that we will need more than that to buck up. “Looking beyond the results of the upcoming General Elections in April 2014, the economy will not only need a clearly defined vision and competent economic management, but will also require proactive, industry-centric decision making along with sweeping reforms in a number of areas to drive faster growth. From the standpoint of both the economy and the commercial real estate sector, reforms are specifically required in areas, such as slow project approval processes, supply bottlenecks, opening up key sectors like retail to FDI, and infrastructure creation through PPP projects,” he says.
The suburban story is likely to continue in the year to come as well. “Cities like Mumbai, NCR and Bengaluru will continue to see occupiers’ preference for peripheral submarkets, owing to availability of large quality space, better commercial terms and fast developing support infrastructure as well as their proximity to major residential hubs where most of the talent pool resides. Meanwhile, other major cities like Chennai, Ahmedabad, Hyderabad and Pune are expected to continue to witness healthy traction in their suburban submarkets,” says Sanjay.
The change, if any, will be visible only in the second half of 2014. As Anuj puts it, businesses are likely to show greater confidence in terms of investing in their expansion plans. “This would result in increased office space absorption. Overall, it is reasonable to expect better growth in rental and capital values in 2014 as against the current year.”