Residential Real Estate Sector Poised For an Upcycle

According to the Real Estate Thematic report of Motilal Oswal Financial Services Limited (MOFSL), the Residential Real Estate sector is poised for an upcycle, primarily buoyed by the improved affordability. Decadal low (sub-7%) interest rate regime, stagnant prices over the last seven years, and rising income base (last 10Y CAGR: 7-10%) have driven the affordability quotient. After a spike over CY09-14, Real Estate prices have remained stagnant across the top seven cities during the last seven years, while income posted a steady 10Y CAGR of 7-10%. Coupled with low (sub-7%) interest rates, home affordability is at its decadal best leading to renewed buying interest. Further, the realized importance of owning a house and tAdd Newhe need for upgradation – given the likely hybrid working environment – is helping to resurrect the structural pent-up demand. The Aug-Oct’21 data for Mumbai depicted strong signs of a recovery with registration at its decadal high despite no stamp duty relaxation. Further, according to Knight Frank, 2HCY21 sales at ~133,000 units for the top eight cities were the highest half-yearly sales numbers since CY15. Manageable inventory levels to induce gradual price hikes Disciplined launches across the top seven cities have led to a continued reduction in inventory level (at 23 months now) since the peak of CY14. However, the level is still a bit far from the inflection point of 15-18 months in CY08, which led to ~60% increase in prices during CY09-14.  Listed players, albeit, are better placed with only 15-21 months of inventory. The lower inventory hangover and strong demand uptick act as catalysts that have enabled the companies to absorb cost pressures, and take 3-4% price hikes over the last 6-9 months. These catalysts are also likely to expand the overall profit pool for the sector. Organized players stand to benefit The triumvirate of demonetization, Goods & Services Tax (GST), and the Real Estate Regulation Act (RERA) sent shockwaves through the industry and marked the beginning of consolidation, with 40-80% of developers across the top seven cities exiting the market. The NBFC funding channel has hit a roadblock for most Tier II-III developers, post-IL&FS crisis, leading to a 400-600bp gap in the cost of funding v/s larger developers, and concentration of capital flows. Companies across the listed universe are looking to double their annual presales run-rates over the next 3-4 years, driving a 20-25% CAGR.