Change in buyer perception, pent-up demand driving home sales: Knight Frank India MD

2023 has been a year of many dramatic shifts and a tumultuous year in terms of interest rate hikes. The debate on whether to implement work from office or let employees continue to work from home has been doing the rounds. From 2012 onwards, the residential sector was on a complete decline till 2020, and while structural reforms were made by the government in this segment, the demand just didn’t pick up, more specifically amongst the youngsters. They were happy leasing apartments rather than buying. The businesses were also under severe stress and pressure.

Then the pandemic happened; we saw a major shift in the buyer’s perception towards owning a home. Of course, it was also aided by decadal low interest rates (during the pandemic time). The buyer perception change that took place in 2020 has continued and all the runway that had been built up with pent-up demand in the time from 2012 to 2020, has now erupted. There is continuous buying, regardless of the interest rate increases over the last two years after the high levels of inflation.

Despite the fact that interest rates increased by about 250 basis points which lead to 200 basis points increase in the housing rates, the demand for housing has continued to rise. That’s the real positive that I see in this sector, and this is throughout the country.

We have a huge pent up demand for over a decade in which we had postponed buying decisions for various reasons, and that’s going to affect people. If you look at it, they have substantial runway to growth at this point of time, when they’ve been in a mature market for a long time and ours has been a fairly declining market. You may have noticed that within the residential sector also. If one dices and deciphers a number, we will see that the sectors which are less likely to be affected by high level interest changes, which are the mid-income and premium, have done far better than the affordable. The game is very different from what was happening in the period from 2012 to 2020, when the majority of the residential purchases were in the affordable sector.

I hope not. I think there’s been a substantial amount of consolidation over the last 10-12 years. There are mature players in the market today and I do hope that the supply and demand keep track of themselves. If there is, again like what happened prior to 2012, and there is unreal expansion regardless of the demand, then you could have a situation with a bubble coming in. But at this point of time it’s too early in the growth story. It’s just been over a year really.

They (top players) are far more confident of placing bets on purchase of property, and thereby doing it themselves. There’s a lot of confidence in the market today by the developers to go ahead and build and construct the project. During the time when the markets were slightly depressed and declining, they preferred to restrict the investments perhaps only to such construction, sharing risks and profits. But today they are far more confident and bullish in doing the development themselves. And with all the regulations, many developers prefer to have no other baggage and do the development themselves.

 I wouldn’t give any outlook on the growth. But I think last year, we perhaps may have had an overall 8-10 per cent increase in prices. And as long as the growth in prices remain in line with what the income appreciation is, I think it’s sustainable to that extent. It really depends on how the GDP grows, and how the income levels grow. Knight Frank comes out with an affordability index.

The affordability has improved substantially, since 2010 right up to 2021. In Mumbai, our affordability ratio, which is a ratio between the EMI versus the income levels, was close to 93 per cent; the affordability has improved substantially and grown up by 53-54 per cent, while in all the other cities, the affordability has improved to amounts less than 30 per cent. So, if the affordability index still remains below 40 per cent in many of the cities, it is still all right. But if it’s suddenly shooting up there, then there are signs to worry.

We have always been bullish on the office market. We feel that the office segment is a great segment to be in, especially in a country like India. Unlike the rest of the world, in India the return to office was very strong. Barring some sectors which had problems, most of the India-facing businesses saw return to work at a much higher percentage than many of the other western economies.

We have a strong economic growth, strong return to office, as well as strong levels of employment, and the requirement of space was strong. In addition, a large number of global capabilities centres started coming to the country. I reckon they’re close to 2,000 odd GCCs in the country today. We reckon that this year, we might just about equal if not surpass the highs of 2019.

I think India facing businesses is as important today as foreign companies. And foreign companies have been with us for a long time anyway. So whether it is tech or multinationals or India facing, it’s a good combination of all. I think it’s a nice balance to have.

Office segment has always been a favourite segment for PE investors, and they’ll continue to put money in if they feel that the long-term macro trends are positive. PE investors were a little sceptical about what was happening in the office segment, work from home or from office. People were perhaps more mindful about the investments. In India I would say 50 to 60 per cent of the PE investments coming into India would be in the office segment.