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5 interesting things to know about Indian real estate
Annual reports may often seem boring, but they are full of important information. Investors can get a lot of knowledge from these reports if only they read it right. The best bit-this information is not just about the company and its financials, but also about the industry it works in and the economy at large.
For instance, Godrej Properties issued its annual report for the year 2014-15. It has become the second largest developer in the country in terms of sales volumes, as per the report. The Management Discussion & Analysis section has some interesting snippets of information about the real estate market in the country.
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Depressed market:
The real estate sector has been one of the worst hit by the economic slowdown. High interest rates mean home loans will be costlier. Even for the builders, financing projects have become expensive. Plus, property values have already touched new highs. As a result, demand has remained low for the new property purchases especially for the residential market, which saw a fall in sales as well as new launches. "National sales volume declined by 17% and new launches fell by 28% in CY2014. A total of 234,930 units were sold during 2014 compared to 284,550 units in 2013," the Godrej report said, quoting property research company Knight Frank.
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Outlook:
Yet, Godrej Properties is optimistic about the rise in demand for houses in the near future. Three key factors can contribute to this rise in demand, as per the report. These are - rise in the creation of cities, easier availability of home loans (as interest rates fall) and lastly, smaller size of households. Today, there are more nuclear families than joint families. This means a family which once occupied a single house could now live in many. This leads to a rise in demand for houses. Urbanisation-the formation of cities-also causes a rise in demand for houses. This is because more people migrate to a new city for employment and buy or rent houses.
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Commercial market:
The story is not so different for the commercial real estate segment. There is a difference though-the market showed signs of recovery. For the last many years, developers cut down on the launch of commercial projects because of the poor state of the economy. They concentrated on selling whatever projects remained unused. This paid dividends in calendar year (CY) 2014. A total of 30.3 million square feet of commercial properties were sold in 2014, a good 39% more than the previous year. Companies also leased more space in the year. As a result, developers expect that vacancy will gradually reduce between 2015 and 2017. The pickup in the economy and corporate expansion plans could help improve the commercial real estate market too, the annual report said.
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Rise of the middle-class:
"Capital values of properties have surpassed the 2008 peak value," Godrej said. As a result, many developers are worried that the customers may not be able to afford bigger, costlier properties. This is the key reason for poor demand. To cope with this, developers are building smaller, cheaper apartments. This targets mid-income customers, who will be able to afford such houses. "New launches in Rs 10 million/unit category witnessed moderation, a shift away from higher ticket size trend, which was a mainstay for the past 2 years," the Godrej report said.
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Risks to growth:
The real estate market faces three key threats as per the report-unfavourable government policies, lack of easy money, and shortage of technology and labour. "There are substantial procedural delays with regards to land acquisition, land use, project launches and construction approvals," the report said. This causes bottlenecks, which delays projects or increases cost. Developers also face hurdles financing projects. Currently, banks can only lend 15% of their total loans to realty, including housing loans as well as project loans. This leads to a shortage of money to fund projects. Lastly, the sector faces a severe shortage of both labour as well as effective technology. This increases the time taken to finish projects as well as overall costs.
Here is a look:
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6%
Everyone says the real estate sector is crucial for the economy. It helps generate jobs. It can be a good source of revenue for the government too-think of all the property-related taxes you pay. Yet, the importance is often realised only when we look at real numbers. "It is one of the fastest growing sectors contributing about 6% to India's GDP," the annual report states. As per advance estimates, India's economy measures $2.1 trillion. This means, the real estate market contributes $126 billion.
