Indian real estate sector set to recover on rising housing demand

V Nagarajan

After being in doldrums for the past three years, India’s real estate sector is set to recover. As more of India’s population heads to the cities, demand for housing increases.

India’s young workforce stands to benefit from affordability at almost unprecedented levels in terms of mortgage payments relative to income growth, that has declined to 28 per cent in first quarter of 2022 from 53 per cent in 2012.

House prices are 3.2 times average income in India compared to 6.7 times in China.

In fact, the five biggest cities in the world, with the lowest rental yields, are all in China, making it one of the most expensive countries in the world, according to Morgan Stanley’s report titled Emerging India in a multipolar world.

Residential inventory levels have declined to a nine-year low of 24 months of sales for the top seven cities in India. Nominal wage growth of around 8 per cent should fuel demand just at a time when supply has declined.

While Chinese property firms are facing debt deflation, falling asset prices with high debt burden, property markets in India have healthy debt ratios and in Morgan Stanley’s view, a high probability of increasing asset prices. India’s real estate sector has been cleansed of weak players. Developers have been prudent with their finances and have cut their balance sheet debt by half over the last three years.

Real estate lies at the heart of an investment cycle. While investment to GDP ratio in India hovers at 30 per cent, China’s has peaked at 45per cent and a big share of that is real estate investment.

The real estate sector accounts for around 29per cent of GDP in China, more than double the ratio in India, according to IMF economist Yuanchen Yang.

As Indian developers are not allowed by the Reserve Bank of India (RBI) to take loans from abroad, there are no dollar-denominated borrowings in the sector. The banking sector today stands much healthier with steadily improving nonperforming loan (NPL) ratios and no asset quality concerns as such. According to the RBI, businesses have seen a steady net profit-to-sales growth over the past year and are sitting on piles of cash.

It is true that India will face headwinds from geopolitical uncertainties. Inflation and global supply chain disruptions will challenge the government’s ability to smoothly manage the economy, however macro fundamentals today are stronger than that seen during the 2013-14 period. But unlike China today, Indians benefit from a healthy real estate market and global businesses seeking more resilient and cost-effective alternatives to China.

The stage is set for Delhi to move forward with an investment cycle to create a path for growth. That way, India truly emerges from under the shadow of China.

The Indian residential sector is expected to remain buoyant in the festive fourth quarter. Despite the recent fourth consecutive repo rate hike by the RBI which led to increased home loan rates, housing sales are likely to remain more or less the same as last year.

As per Anarock research, 91,000 units were sold during the festive quarter Q4 2021.  This year, even while home loan rates and developer prices have increased in the wake of 190 bps repo rate hike by the RBI and input costs, respectively, the sales momentum will continue.

Grade A developers are reporting high sales despite a price rise, and this will prevent them from any significant reductions in average property prices in the upcoming festive quarter. At the most, only smaller developers may reduce the prices to attract buyers in the upcoming festive season.

Going forward, residential demand is expected to remain steady and be driven primarily by the end-users, which will inevitably prevent any unnatural speculative spikes. Grade A developers will continue to dominate the residential market and gain more market share.

A group of friends have invested jointly in real estate in India. Now a portion of it is being liquidated. How do we ensure that tax implications are minimised while receiving the sale consideration. Gautham, Sharjah

It is suggested to transfer the amount to each of the co-investors in accordance with the share that they had initially invested in acquiring the asset. While minimising the conflict among partners, it will also help in ensuring transparency in the deal in allocating proportionate to the share they hold in the asset. This will also enable every partner to pay capital gains tax on the sale proceeds after taking into account the cost inflation index benefit as well.

I have given power of attorney to my relative to deal with the acquisition of immovable property in Pune acquired while as a resident in India. Now that I am planning to sell the property, should I cancel the Power of Attorney? Please clarify. Prakash Dhorda, Dubai.

In the absence of lack of clarity on type of PoA given to your relative, it should be noted that if the sole objective of giving the PoA for acquisition, then its purpose has been served. A review of the details would enable to ascertain whether any additional rights have been given to him. In such a scenario, there is a need to remove any chance of discrepancy in the future.