Realty sector has not performed as bad as it is perceived to be

The pandemic has hit hard the industry and economy, across sectors. Real estate is no exception. However, given the current situation and considering so many other factors, Indian realty sector has not performed as bad as it is perceived to be. Some consolidation has taken place in the market, particularly in the residential space. End-users are looking at the market, investors are also coming back. Riding on a strong underlying demand for office space with quality workforce and average rentals available at less than a dollar per sqft, successful REIT listings, which provided a good monetising option for PE investors, the commercial realty space did not perform that bad either. Speaking to Bizz Buzz exclusively, Soumendu Chatterjee, Director and city head (Kolkata), Anarock Property Consultants Pvt Ltd, explains his take on the Indian realty sector at length

Riding on a strong underlying demand for office space with quality workforce and average rentals available at less than a dollar per sq. ft, successful REIT listings, which provided a good monetising option for PE investors, the commercial realty space did not perform that bad either

Restrictions are now easing across cities and the vaccination drive is gathering momentum. We, therefore, anticipate residential demand to see steady growth in the upcoming quarter. The previously-noted structural shift in housing demand continues - many current homeowners seek to upgrade to larger homes and the previously purchase-averse millennials remain very active property buyers

When it comes to realty space, what is the current scenario like - in residential and commercial segment?

It is not as bad as it is perceived to be. I would say that a market consolidation of the sort has taken place among the credible developers, whose track record and credibility have been time tested in terms of quality of construction, design, architect, timely delivery, compliance with the law of the land, pricing and so on.

In the residential segment, there has certainly been a V-shaped recovery since the break out of the Covid pandemic. Developers have not stopped building or developing properties, but only recognised developers are developing these properties. Similarly people have not stopped buying properties, but they are buying only from trustworthy developers.

In the commercial segment also, I am quite bullish and optimistic. At the end of the day, man is a social animal, as they say. And people need and people love socialising. And therefore, despite all these talks and hypes over 'work from home', 'growth of e-Commerce', I am quite confident that given a chance, people would love to go to their office, mix with colleagues and peers in person and similarly when there is an opportunity, people would love to go to retail outlets, malls. Because, for a vast majority that's a source of unwinding, relaxing and entertainment as well. This was amply proved as soon as the unlocking after the first lockdown had begun. That's why online retail percentage in India is still very low.

What and how has been the scenario over the last one and half year?

Many say that the second wave of the Covid-19 pandemic has been more 'devastating' on the real estate sector than the first one, as new launches and sales have fallen drastically since April this year. There has been a fear of project delays due to the local lockdowns across different States of the country. The real estate industry dealt with few key challenges during this period such as labour shortage, financial constraints, approval delays, hike in the raw material prices and the weakening customer demand due to the uncertainty in the market.

For residential real estate, the first Covid wave in 2020 had a significantly deeper impact than the second wave this year. ANAROCK data reveals that housing sales in Q2 2021 stood at approximately 24,570 units across the top-7 cities, increasing by 93 per cent annually, but dropping by 58 per cent Q-o-Q.

As many as 12,740 units were sold in the corresponding quarter of 2020, and 58,290 units in the preceding quarter (Q1 2021). MMR and Pune drove a massive share of housing sales between April and June 2021 with a 46 per cent share of the total sales. Consider some other facts and figures as well. PE investors pumped more than $6.27 billion into the Indian real estate sector in FY21, up 19 per cent from the FY20's level of $5.8 billion. And 93 per cent of these PE investments was by foreign investors. In FY21, investments by foreign PE funds nearly doubled from $3 billion to $5.8 billion. Compared to this, domestic PE funds invested only $300 million as against $420 million in FY20. As you can see, quite contrary to popular perception, things have not been too bad!

But what has been the average ticket size of these transactions?

Good you raised this point. The average ticket size of PE deals in fact went up by 62 per cent – from $110 million in FY20 to $178 million in FY21. Structured debt also witnessed a strong growth of 84 per cent. Compared to these, equity recorded a smaller growth- but a growth no doubt - of 15 per cent during this period.

Who all have been/are buying these properties- investors or end users- during this time? And in which segment - affordable mid-sized, premium?

Mostly end users. But the good thing is that the investors have started coming back as well. And more so with no significant price escalation having taken place. Due to the second Covid-19 wave, average residential property prices across the top-7 cities remained stagnant in Q2 2021 against the preceding quarter. On a yearly basis, Bengaluru and NCR saw the average residential prices rise by 2 per cent, while MMR, Pune, Hyderabad and Chennai saw average property prices increase by one per cent. Kolkata saw no yearly change in average property prices.

Just to give you some figures, you would be surprised to know that the premium budget category (priced between Rs 80 lakh to Rs 1.5 crore) saw maximum new launches in the quarter with a 36 per cent share. Next came the mid-range segment (priced between Rs 40-80 lakh). Unlike in previous quarters, affordable housing accounted for just 20 per cent of the new supply in Q2 2021.

In Kolkata alone, 1,520 units were sold in Q2 2021, increasing by 108 per cent annually and declining by 43 per cent against the preceding quarter Q1 2021. Kolkata added approx. 1,990 units in Q2 2021, an increase of 10 per cent over Q1 2021. Over 73 per cent of the new supply was added in the affordable segment. I would say, mid-sized, affordable, premium - the market is moving in this order.

When do you think the Indian realty market may bounce back?

Restrictions are now easing across cities and the vaccination drive is gathering momentum. We, therefore, anticipate residential demand to see steady growth in the upcoming quarter. The previously-noted structural shift in housing demand continues - many current homeowners seek to upgrade to larger homes and the previously purchase-averse millennials remain very active property buyers.

Besides, the Union Cabinet's approval for the Model Tenancy Act is being hailed as a landmark moment in Indian real estate. In one of the most significant developments for residential real estate investors, no one will henceforth be allowed to enter into a rental situation without a written agreement – and that's not all.

Aimed at increasing confidence of landlords to rent out their vacant properties, this Act will serve as booster for NRI investments. For an NRI investor, it is a great assurance that the tenant of their property is bound by legal terms. Further, the act defines the timeline within which any rental disputes will be resolved.

The new law also calls for a digital platform where tenancy agreements need to be submitted to the rent authority in future. Digital infrastructure is more convenient and brings an added level of transparency for NRI landlords. With this Act, there is now a clear demarcation of responsibilities between a tenant and landlord.