Home sales demand will see some slowdown if mortgage rates “breach comfort levels” of the 10 per cent-mark. On top of that, recessionary traits and job losses across IT and start-ups are “more than real now.” All this impacts purchase decisions and could lead to a “challenging 2023,” says Prashant Thakur, Research Head at real estate consultancy firm Anarock Group.
In an interview with businessline, he talks about the challenges to home demand in 2023, the changing business dynamics in the NCR, and commercial leasing activity slowing against the backdrop of recessionary trends. Excerpts:
Considering the increasing trend of home loan rates, will this reflect on demand?
Typically, buyers have a comfort level of up to 10 per cent (mortgage rates). And as mortgage rates breach the double-digit mark, they start deferring purchases, or we see a slowdown in demand.
Now, during the two-odd years of Covid, mortgage rates were at their historical lows. Such low rates were not sustainable in the long term either. Those making purchase decisions had factored in an increase. It did not have much of an impact on demand.
ANAROCK’s consumer sentiment survey conducted in 2022 has indicated similar trends: that if the home loan rates breach the 9.5 per cent mark, there will be a high impact on the home-buying decisions of at least 93 per cent of survey respondents.
Currently, the rates are inching up, very close to breaching the comfort zone. And with inflation still on the higher side, the probability of another round of rate hikes by the RBI is not ruled out. The other factors are prominent recessionary trends, job losses being more than real in India too, and start-ups witnessing a funding winter. Combining the two factors, 2023 is expected to be a challenging year.
The numbers have yet to reflect a slowdown. Your comments.
There will be a lag effect of a few quarters here in India. However, we do see delays in buying decisions as people want to wait, and ensure the surety of cash flows before committing to such purchases. For instance, from the site visit to the closure of the transaction, this was a 65-day process previously. But now the timeline has increased significantly.
In terms of impact, IT cities like Bengaluru, Hyderabad, and Pune would see the maximum impact on demand.
Do you anticipate any rise in home prices?
The sector went through a 10-year slowdown before an uptick began some quarters ago. Developers were a bit cautious of price rises then, and whatever hikes happened last year (Jan–June) were driven by rises in raw material costs, like steel, cement, paint, copper, and so on. But, developers managed to hold on to hikes in H2.
Now when the market is anticipating a slowdown, it is unlikely that developers will risk increasing prices and further slowing down demand. At the most, they would factor in inflation.
So without ex-Mumbai, average sq ft rates across India would be around ₹3,000–5,000; and factoring in Mumbai these would be ₹6,500 per sq ft.
Will we see a funding winter in real estate too?
Grade-A and listed developers don’t have an issue, as most have been able to clean up their balance sheets and bring their debt to manageable levels. The market is also consolidating towards trusted brands. The grade-B developers, who have their clearances in place, are also able to secure finances. But unbranded and Grade-C developers continue to face trust issues with buyers and banks.
Any change in demand scenarios in the NCR—Noida, Gurgaon, and so on?
Gurgaon demand really picked up post-Covid, and now the additional demand has extended to the Noida region too.
Our data indicates that in the last decade (2012–2022), the year 2022 recorded the highest home sales in Gurugram, of approximately 32,620 units. The year 2012 saw the second highest home sales in the city, with approximately 30,460 units sold.
No major project is coming up in proper Gurgaon now, except in the peripheral areas. Some Grade-A developers, like Godrej, are now venturing into Noida. It is a good sign in some ways.
The Noida authority has also made it mandatory that developers need to pay for the land parcel upfront and not in tranches, which means deep-pocketed developers get into the segment. The first phase of consolidation saw some stalled projects being taken up by financially sound developers.
And the ones that are left out now have various attached liabilities, like structural stability, absence of clearances, and so on. We anticipate that 20–25 per cent of these older projects in the Noida area will remain unsold or unoccupied.
Are office rentals under pressure too?
Office rentals have come under pressure because of recessionary trends gaining prominence. Hybrid work models and hub-and-spoke models impacted the requirement for large office spaces (one million sq ft and above). Start-ups – one of the big ticket space buyers – too are going slow now. However, we expect this to improve H2 2023 onwards.
And REITs?
The proposed taxation on dividends by REITS has hit its attractiveness. So beyond the three, we will not see any new come up immediately. Some big players, like DLF, are now going a bit slow on REITs.
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