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Sentiment driving residential realty for now

LiveMint logoLiveMint 16-06-2014 Saurabh Kumar

A survey conducted on behalf of Mint by property portal Makaan.com shows that 71% of the respondents have decided to buy a house after taking into consideration the formation of a stable government at the Centre. What’s more, 80% of the respondents believe that the new government will have a positive effect on the real estate sector. The survey included 1,400 respondents from across more than nine cities in India.

It’s not surprising that developers, too, are keen to reap the benefits of the buoyant market and are coming out with various offers to attract customers.

Bangalore-based Puravankara Projects Ltd, for instance, is offering a scheme under which a certain number of buyers can save on the “home loan interest rate”. It is offering customers reimbursement on interest payment of up to 3.51% for two years along with other add-on benefits. “The investor sentiment, which was subdued 8-9 weeks back, has changed in the past few weeks. Everyone is competing and we wanted to be the first mover,” said Jackbastian K. Nazareth, group chief executive officer, Puravankara Projects. He added that the upside for the company, of course, was that it got volumes and cleared inventory.

But is the euphoria justified given that fundamentals do not change this quickly? What has changed in this short span to make people optimistic, and is this sustainable?

Key change

“Sentiment,” said Samantak Das, director-research and advisory services, Knight Frank India, was the main factor behind the change. According to him, the residential demand in India is driven by sentiment rather than by economic rationale. In office space, however, it is the other way round.

Though the fundamentals of the larger economy of the country have remained the same, the strong mandate given by voters has helped buoy the sentiments of administration, buyers and sellers. “What the market lacked earlier was ‘consumer confidence’,” said Nazareth.

However, there is a differing view as well. According to Hariprakash Pandey, vice-president-finance and investor relations, Housing Development and Infrastructure Ltd, the process of change had started some time back but got noticed only now, and people are linking it to the general election results. “But, of course, news of infrastructure development between satellite towns and main cities and the strong election mandate have given a fillip to the sector,” he said.

The S&P BSE Realty index went up 35.62% in May 2014 compared with a mere 12.43% in the last one year.

Linkage effect

A major driver of the strong sentiment in the real estate sector is that it has linkages with other sectors and larger macroeconomic factors, which are also expected to do well in the ensuing months. “All economic activities—manufacturing and infrastructure—apart from governance are drivers of real estate growth,” said Das. These activities aid connectivity and overall livability of an area, which makes real estate projects attractive. The government is expected to create an environment that is conducive for all stakeholders.

However, Das cautions that the central government will have to convince state governments and get them on board as real estate is a state subject.

The central government will also have to work along with the Reserve Bank of India and banks to bring the interest rates down. If that does not happen in tandem with revival of the overall economy, the initial confidence shown by consumers may fade. In the survey mentioned earlier, 68% respondents said they expected home loan interest rates to fall from the current levels. One-fourth felt residential real estate prices will stabilize, while another quarter felt that these will actually fall by 10% in the next 12 months.

“Though there is a section of investors that is showing interest, a big chunk will wait to see the revival actually happen,” said Das. Whether that happens or not will depend on the policies and decisions taken by the government.

The real picture

The traction being seen in real estate is happening mostly in the residential space, especially in the affordable housing segment. “It is the sub-`50 lakh and sub-`75 lakh launches that are taking place now,” said Das.

The Mint-Makaan.com survey, too, shows that 60% buyers are looking to buy units in the segment of up to `40 lakh. The buyers in this segment mostly come from households with incomes up to `10 lakh, which is the section that has borne the brunt of escalating house prices and shortage of affordable supply.

Out of the 1,400 respondents included in the survey, 67% belonged to this income category.

The government, too, has announced that it will be concentrating on the affordable housing segment, but this will be mostly for the lower income segments.

While housing is drawing a lot of attention, the office segment of real estate sector, which is mostly driven by economic rationale, is not attracting much interest.

“Expansion in this segment will happen only after seeing what the central government is actually doing,” added Das.

Final word

Here are a few questions to mull over: Is this euphoria really sustainable? Will it boost sales? Will demand-supply see better equilibrium?

Most parts of National Capital Region, Mumbai and Bangalore saw 30-40% shrinkage in absorption and supply in the past 2-3 years. “This truncated size needs a boost. The euphoria right now will definitely provide short-term relief,” said Das.

But one needs to wait for a few quarters to gauge the actual ground level traction. Only by December this year will one be able to see real change in the residential scenario, and then another couple of months for the office space to reflect change, said Das. The initial direction may be evident within a quarter or so.

The expectations of revival in the real estate sector from the developers’ side, and buyers’ hopes of cheaper home loans and houses are part of the preparations, which started a few weeks before the election mandate came in because the market sensed an imminent change in the leadership. The next step would be the Union budget. Hopefully, the stakeholders will not be disappointed.

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