Residential real estate continues to struggle, office leasing strongest in three years

Average real estate prices across India have been stagnant and have shown only a slight increase in recent months. Photo: Aniruddha Chowdhury/Mint

Sales in the residential housing segment has been gradually coming down since 2013-14, and the sector is struggling even after almost five years of sluggishness. As a result, inventory level continues to remain high in the segment, despite fewer project launches. However, commercial real estate, especially the office segment, is in a healthy state if we consider demand and leasing.

Residential sector

According to a report for the month of July 2018, by Kotak Securities Ltd, “All-India real estate sales across major cities clocked 22.2 million sq.ft in July 2018 against launches of 7.9 million sq.ft. We highlight that launches in July 2018 were significantly lower than monthly average of 14.5 million sq.ft seen in the past 12 months. Consequently, inventory across India dropped 10% to about 1 billion sq.ft from 1.1 billion sq.ft in July 2017, reflective of the decreasing launch activity.”

Though there is a decrease in the levels of inventory across India, it is still very high and it will take months for developers to clear it at the current sales volume. The situation is worse in the National Capital Region (NCR) and Mumbai Metropolitan Region (MMR). As per the Kotak report, “Across all metros, launches remained the lowest in Delhi NCR with only 1 million sq. ft released in July 2018 in peripheral regions of Ghaziabad and Greater Noida. Net unsold residential inventory in NCR stood at 243 million sq.ft as of July 2018 and is equivalent to 63 months of sales (based on average sales of trailing 12 months).

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Similarly, outstanding inventory in MMR remains the highest across metros at 290 million sq.ft as of July 2018 (equivalent to 54 months of sales).”

As far as property prices are concerned, it either remained stagnant or increased marginally. “Across India, average prices saw a slight increase in July 2018 averaging around ₹6,100 per sq.ft (₹6,000 per sq.ft in 1QFY19). On monthly basis, prices remained largely flat in NCR in July 2018 at ₹4,521 per sq.ft (up only 1.4% year-on-year),” stated the Kotak report.

Commercial sector

While residential real estate is struggling, commercial real estate is witnessing healthy demand, especially in the office space segment. According to a recent office leasing report by Cushman & Wakefield India, “Commercial office market is witnessing a robust streak, buoyed by strengthening business confidence, and optimistic prospects in the fastest-growing economy in the world. Office leasing registered strong gains of 15% at 33 million sq.ft across the top 8 cities of India, during January-September, as compared to the corresponding period last year.”

There is adequate supply in the office segment as well, which is keeping rent in control. “NCR region, comprising Gurugram and Noida, currently has the highest vacancy at about 29 million sq.ft, which is likely to keep rentals in check, as future supply is expected to keep pace with incremental demand,” stated the Kotak report.

The outlook

The question is whether stable and continuous demand in the commercial sector can have a positive bearing on demand in the residential segment.

“Since 2013-14, it was free fall in the residential segment, but things have started settling down since the beginning of 2018,” said Samantak Das, chief economist and head of research, JLL India. Because of various issues, buyers’ confidence is still very low in the residential segment and it will take at least two years to get back that confidence, before we can expect any substantial demand, added Das.

Prices in residential real estate market are not expected to increase in the near future and buyers have ample time to do the due diligence to choose a suitable property.