Real estate continues to be the asset class that investors hate to love. If it was the pandemic that threw dark shadows in the last two years, we had inflation cast a pall in 2022. And with back-to-office demand happening only in fits and starts, the property market had a lot to cope with. But the bumpy road had some good turns for some segments, such as residential property.

Dent in rent

One negative surprise was the lacklustre and uneven pick-up in the commercial rental segment. Office space leasing had a setback during Covid and it was expected that things would recover strongly post the pandemic.

However, office market data report from property consultants JLL showed that vacancy was at 16 per cent overall at the end of Q3 2022. While a few cities saw good offtake and some rental increase, supply additions have kept price jumps at moderate levels. The slow pick-up is also attributed to preference for hybrid model of work — a smaller core office with a flexible arrangement to work from home.

That said, flex office space operators did not see a boom either. They are on a slow path towards the pre-pandemic levels — in the nine months of 2022, the segment leased 6.6 million sq ft (msft) of space, compared to 10.4 msft leased in the 12 months of 2019.  

Also, rising interest rate and perceived slowdown in hiring have cooled the already tepid market for REITs, which have been focused on office spaces. Since the regulation in 2014 and the launch of the first REIT in 2019, there have only been three public issues. A news report from Reuters noted that the regulator is thinking of creating new micro-REITs with smaller asset value, to spark enthusiasm for listing.

Additionally, Private equity (PE) investments in the real estate sector fell 17 per cent, as per a report from Knight Frank India. The dip was seen in office, residential and retail sectors. One bright spot was warehousing, which saw 46 per cent y-o-y growth to $1.9 billion (of the $5.1-billion total investments).

Housing delivers

Interestingly, the residential property market had a rosier picture overall. Data from the CREDAI Colliers Liases Foras report showed that housing prices across the top eight cities in India (Delhi-NCR, MMR, Kolkata, Pune, Hyderabad, Chennai, Bengaluru and Ahmedabad) continued to rise in 2022. The National Housing Bank’s Residex index showed strong price increase in the last four quarters in markets such as Noida, Pune, Bengaluru and Kolkata. But Mumbai — a large market — lagged in price growth and areas such as Panvel around Navi Mumbai saw small price dips, based on the market price data from this index.

Housing property markets in smaller cities have been showing pockets of strength and data also bears that out. Smaller markets — such as Guwahati, Lucknow, Bhubaneswar and Patna — saw huge price increases as seen in the Residex index. But the tier-2 growth story was not universal, with cities such as Coimbatore and Meerut showing flat or falling prices.

The price increases reported were only moderate. Data from Liases Foras showed that 80 per cent of new launches in tier-1 cities saw price increase and about 60 per cent of the increases was moderate (under 5 per cent). And with increasing cost of raw materials, the higher prices may not have translated to more profit for developers.

Still, there was optimism, as seen from increase in new projects. Data from Liases Foras showed that tier I cities witnessed a 43 per cent y-o-y jump in new launches in the September quarter of 2022, with cities such as Bengaluru seeing a whopping 263 per cent increase. Higher launches led to more unsold inventory stock, despite a 13 per cent y-o-y increase in sales overall.

Another shift was in the nature of the for-sale units. From a preference for completed units — which were available in many markets — sale is shifting to earlier stages of a project. Data from CREDAI Colliers Liases Foras showed that 94 per cent of the inventory currently is homes that are still under construction. How soon in the project the homes are being bought will give an indication of demand — end-user and investors — as well as price trajectory.

Select segments

Though the residential market saw an uptick, there were differences in the price ranges. Data from Liases Foras showed that the majority of sales and new launches was is in mid-income (₹50 lakh to ₹1 crore) price range. Inventory levels in the less than ₹30 lakh segment increased significantly (by nine months) in the September quarter of 2022 and, despite the small ticket size, has the highest value. However, sales volume is higher than launches in this segment, which can help keep inventory in check.

Homes in the luxury segment (above ₹1 crore) saw a drop in months-inventory — time in months it takes to clear inventory at the current rate of sales — during the quarter. It is also interesting to note that the oft-touted NRI buyer interest in the luxury segment, which comes up when the rupee depreciates, was notably missing this year.  

The author is an independent consultant

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