Market is in consolidation mode In 2017, it took 40 projects with the highest sales per project to cumulatively sell 10,000 homes. By 2019, that number has dropped to 17 projects.
- Developers with a track record are getting rewarded with sales driven by high consumer demand The share in sales of the Top 20 Developers has gotten stronger especially post RERA
- Offtake at a 4-year high (94,383 units) Increase of 15% over the last 12 months
- New Launches at a 4-year high There is an overall increase of 37% in new launches and it has hit a 4-year high
- Supply is outpacing demand At a replacement ratio of 1.17, clearly more units are being added than being taken out
- Affordability Index shows highest affordability compared to the past 8 years Trends in affordability over time indicates that affordability is at an all-time high as on Dec ’19 at 3.71x Annual Income making this the best time to buy a home.
Gera Developments, pioneers of the real estate business and the award-winning creators of premium residential and commercial projects in Pune, Goa and Bengaluru, today presented the Gera Pune Residential Realty Report for July - Dec, 2019.
Key Highlights of the report:
Total units being built is at an all-time high
Total inventory is at an all-time high. The inventory for sale has also risen after falling since June ’17 indicating supply outstripping demand. The total number of units under development had reached a peak level of 327,670 units in Jun ’17. Since then, on account of a reduction in new project launches, the total inventory contracted for next 2 years and finally rebounded by ~3% to 301,731 units in Jun ’19 from 292,842 in Dec ’18. In Dec ’19 it grew further by ~12% to 336,186 units surpassing the peak in Jun ’17. This suggests that the market has accelerated in the last six months in terms of construction activity. From a peak inventory available for sale at 107,402 apartments in Jun ’16 the inventory available for sale currently stands at 89,887 apartments. Inventory available for sale grew by ~12% as well over Jun ’19 (when it was 80,062 units). However, inventory levels down by 16% from Jun '16 peak.
Since the implementation of RERA, number of live projects in Pune has reduced from the peak of 3,733 projects in Jun ’17 to 3,490 in Dec ’19. As of Dec ’19, the total number of projects on hold (where work has commenced and presently stopped) has reached 249 (the figure of 3,490 live projects excludes these 249 projects). These 249 projects consist of 40,023 apartments and based on our prior data, 23,466 apartments are sold. This means approximately ~24,000 families are stuck with incomplete projects at present.
New launches at a 4-year high
At a city level, new launches have increased significantly by 37%. This indicates optimism amongst the developer community. As highlighted above, there is an overall increase of 37% in new launches (99,541 apartments launched in the 12 months ended Dec ’19 compared to the 72,503 launched in the 12 months ended Dec ‘18). Due to this increase, new launches have hit a 4-year high (it was at 93,978 units in the 12 months ended 2016).
Looking at the data of new launches by segment, there is a significant increase in new inventory launched in the Premium Category. New inventory launched in the Premium category grew by ~140% (from 8,767 units launched in 2018 to 21,011 units launched in 2019). Launches in the Premium Plus and Luxury segment also witnessed healthy growth rates of 44.5% and 31.9%. The other significant part is that launches in the Budget segment declined by ~10%. While maximum inventory launched is still in the Budget segment (31,324 units in 2019), clearly the demand has migrated to more aspirational segments like the Value segment which also witnessed a good growth rate of ~85%. This finding is corroborated clearly in demand data collected directly from potential customers who visited the CREDAI PUNE exhibition in Dec ’19.
Demand & Supply Gaps
As mentioned earlier, we have seen that there has been a significant increase in new supply in the Premium segment. This is possibly due to migration of demand to higher bedroom types. Data comparing demand and supply gap across the last 2 years clearly indicates where the supply is migrating in response to shifts in demand. In 2018, there was clearly an oversupply in the 1BHK product segment and a clear undersupply in the 2 BHK segment. The market recognizing this mismatch launched 2 BHK inventory leading to an oversupply in 2 BHK. The 2 BHK+ segment is now seeing undersupply where demand is ~27% and supply is ~15%.
(Demand Data is collected annually as part of the Gera Consumer Pulse Study at the CREDAI PUNE exhibition)
Supply is outstripping Demand
One way to look at the real estate cycle is through the lens of “replacement ratio”. The replacement ratio is the new supply added divided by the number of apartments sold. A replacement ratio of 1 indicates that demand and supply are in consonance i.e. inventory being sold is being replaced by new inventory. When the ratio is more than 1 – supply is being added faster than sales and when replacement ratio is less than 1 – sales are faster than inventory addition. The current replacement ratio is 1.17 whereas the replacement ratio hit its peak at 1.455 in Jun ’15. This indicates that supply is greater than demand i.e. more units are being added than being taken out.
Market in Consolidation mode – 17 Projects account for 10,000 units sold
The Market is clearly consolidating. In 2019, 17 projects were needed to sell 10,000 units from the total yearly offtake of 94,383 units. In 2017, 40 projects were needed to sell 10,000 units (2017 yearly offtake was 76,149 units).
We looked at 20 of the top developers in Pune in terms of brand name and repute. To ensure consistency and uniform comparison we maintained the same list of developers over the past 5 years. We then calculated what was their share in the yearly offtake of Pune. The data clearly indicates that over the past their share in sales has gotten stronger especially post RERA. These developers have very successfully managed to take away sales from other developers. Clearly, the reason why most developers are in bad shape is because they are unable to compete effectively with these top players.
The Pune market consists of 3490 projects of which 2386 (68%) projects are less than 100 units.
Overall market prices remain flat but prices rise in the core market (>= 100 units of inventory)
Overall market prices have broadly remained flat over the last 6 months after witnessing an erosion of ~11% from peak levels seen in Dec ‘15. In Jun ’19 average market price was Rs 4,555 Psf which has gone down to Rs 4,530 Psf (a reduction of 0.54%). Average prices in the core market (projects which account for a majority of sales) have grown by 2.6% since Dec’18.
Affordability Index shows highest affordability compared to the past 8 years
We looked at the trends in affordability over time and data indicates that affordability is at an all-time high as on Dec ’19 at 3.71x Annual Income making this the best time to buy a home. Over time interest rates and prices (from Jun’15 onwards) have trended down, while incomes have risen thereby increasing the affordability significantly.
We evaluated the salary needed to buy a home based on the then prices Psf in Jun ’11 considering interest rates at that time. We then increased this salary based on the consumer price index and compared the new cost of the home with the increased salary. In Jun ’11, the salary needed to buy a 1,000 sq. ft. home was 4.83 times. This peaked in Dec ’14 where the salary needed to buy the same 1,000 sq.ft. house at the increased salary and increased rates was 5.27 times.
Since Dec ’14, the consistent reduction in rates and the salary increments have led to a situation where the house cost is 3.71 times the salary. This makes affordability at an all-time high.
Sales Offtake at a 4-year high. Increase of 15% over the last 12 months.
Assessment of sales offtake based on the size of apartment shows that the overall offtake has increased by ~15%, the share of the <600 sq. ft. segment in the offtake has decreased from 29% in 2018 to 27% in 2019. Similarly, share in offtake of the 600-800 sq. ft. segment has also gone down from 24% in 2017 to now 20%. This segment (<600 Sq. ft.) along with the 600 - 800 sq. ft. segment is primarily targeted by the Pradhan Mantri Awaas Yojana. The share of the 801-1000 segment has also increased to 26% in the last 12 months.
Overtime, the share of offtake in the <800 sq. ft. basket has remained consistent has gone down from 50% (2017 & 2018) to now 47% in 2019.
While overall offtake has increased by 15% in the last 12 months, the segment leading the growth in offtake is the Premium segment. With an overall volume growth of 34% in the last 12 months. The Budget + Value segment has displayed a growth of 32% in the same period. There certainly appears to be a trend towards premiumization in the Pune residential market. The Budget+Value segment occupy ~64% of the overall pie in sales volume. However, this percentage has been gradually reducing over time. In the 12 months ended Dec ’15, 72% of all units sold were in the Budget+Value segment while in Dec’19 this share has come down to 64%.
While releasing the report, Mr. Rohit Gera, Managing Director, Gera Developments said, “The stressful situation for a large number of developers is real, but it is due to customers moving en masse to quality developers and has little correlation with other narratives doing the rounds. The stress can be explained by looking at the minimum number of projects that it took to sell 10,000 homes over the last few years. In 2017, it took 40 projects with the highest sales per project to cumulatively sell 10,000 homes. By 2019, that number has dropped to 17 projects. This means in 2017, the projects with the highest sales had an average sale of 250 homes in the year, however by 2019, this average has increased to 588 homes. Essentially this means while some developers have grown their market share and taken a larger share of the sales, what is left to sell is divided over more developers, thereby leaving many developers in a bad shape”
Gera further added that “Affordability has also increased substantially at 3.71 times annual income. This is certainly a strong increase in purchasing power. Customers, however, are no longer willing to buy homes from any developer. Those with a track record, with high standards of governance and a strong view of customer needs, are finally getting rewarded by customers with buoyant sales and price premiums. The sector seems poised at a crossroad. We have seen an increase in supply that is more than the demand. If the union budget brings in any incentives for purchasing of homes through demand stimulation incentives, the industry could see a big change for the positive for many more developers. If however this doesn’t happen, the prolonged stress can lead to many more fatalities along the way leading to further consolidation of the sector.”
CONCLUSION
In our view, we are seeing clear signs of greenshoots in terms of a price rise in projects in the core market (projects sized greater than 100 units). While the overall market (all projects put together) is flat in terms of prices it is doing excellent sales while launching new inventory. In our view the cycle turned in the recent 6-12 months. The offtake of the last 12 months is considerably greater than the current inventory available for sale. We are also seeing a migration of demand from lower bedroom types to higher bedroom types which is currently an under-served market.
This is one impact of affordability i.e. when your overall budget increases due to rising income & falling interest rates, customers seek a higher-grade apartment. We are seeing this trend playing out. Higher grade apartments are also associated with developers with a strong brand name and excellent track record who customers trust to deliver.
