2022 will be a strong year for residential real estate: report

Despite rising construction costs and the RBI’s monetary tightening measures, residential property sales and new starts remained firmly on a growth trajectory.

According to a joint CBRE-CII report, unprecedented sales and launch momentum were seen in the first half of 2022. Real estate prices rose in most micro-markets and across all segments due to record sales and the decision of developers to pass on higher construction costs to buyers.

Given this situation, 2022 should be a strong year for the residential sector, with sales and launches likely to reach a ten-year high and cross the 200,000 unit mark. While continued inflation and the rising cost of financing may impact stakeholder sentiments in the near term, the overall health of the sector should remain strong due to positive homebuyer sentiments.

According to the report, the reasons for the continued strength could be the government’s continued support for housing, particularly the affordable and mid-range categories which have been the main drivers of sales and launch activity in the sector. Additionally, the continued need for home ownership not only bolsters the market share of Tier I developers, but also encourages several new players to enter this space.

Supply-demand dynamics (2018-H1 2022)

Also read: How many types of home loans can you get in India?

Asset price appreciation could be selective going forward

Asset prices edged higher due to strong sales momentum as well as developers’ decision to pass on higher construction costs (due to higher input and labor costs ) on buyers. However, in the future, the capital value

growth should remain limited to a range and in certain pockets and categories. Developers should exercise caution in an inflationary scenario and expecting further repo rate hikes, both of which could impact buying power and buyer decisions. Despite this, end users are likely to continue to be the main market drivers as homeownership sentiment remains strong post-pandemic.

Unsold inventory levels could continue on a southerly trajectory

We are currently seeing declining levels of unsold inventory in most major cities across India except for a few select locations. The drop is attributed to robust sales despite regular new launches. As a result, the inventory overhang at the pan-India level is at its lowest level in six years, with the average number of quarters to sell for projects falling from over 15 in 2017 to under 9 levels in the first half of 2022. The decline in unsold inventory should continue in the short term thanks to the continued strong momentum in sales. However, going forward, developers should be cautious about new launches and focus on projects that will generate real demand to avoid pressure on unsold inventory levels and quarters for sale.

Better alignment needed between developer orientation and buyer expectations

As developers now increasingly focus on larger sized banknotes (more than INR 1-2 crore), demand for units priced below INR 1 crore has continued to dominate sales at first. half of 2022. Similarly, the share of units of 1,500 square feet. and above has increased in new launches, but sales continue to be dominated by units between 500 and 1,500 square feet.

Strong land acquisition momentum to be continued

We have also seen growing interest from developers and investors in this sector. Of the nearly $5 billion deployed to acquire nearly 4,000 acres of development land/sites between 2020 and the first half of 2022, the residential sector accounted for nearly 36%, the highest of any real estate sector. In the first half of 2022, of the total USD 1.1 billion invested in land acquisition in the country, almost half went to the residential sector. Therefore, the sector is expected to continue to hold a large share of capital inflows this year.

Portfolio expansion outside of national markets and into Tier II cities

Several developers, especially Tier I developers across the country, have made inroads or plan to make inroads outside of their home markets. A few developers have even started testing the waters in Tier II cities. This is due to the strong sales momentum currently seen in most cities and the potential growth opportunities these markets present. Moreover, now that these developers have gained reputation and scale, they want to leverage their brand in other cities as well.

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