Post pandemic pent-up demand surge, realty space may face global headwinds in 2023

New Delhi: A surge in post-pandemic pent-up demand helped India's property market overcome risks from rising interest rates this year but the dream run might face hurdles from global headwinds in 2023.

Any moderation in growth will mark a premature end to what industry watchers believe to be the start of a "long-term upcycle" in the Indian real estate sector.

The optimism emanates from record housing sales this year, surpassing the pre-COVID 2019 numbers and the previous high of 2014.

"2022 proved to be a successful year for the residential real estate market as momentum of sales and consolidation of players continued," property consultant Anarock's Chairman Anuj Puri said.

Fundamentally, the market is much more mature and stable than it was prior to the pandemic, he told PTI.

Puri said he is "hoping that 2023 calendar year is as vibrant as 2022 for the residential market, provided the headwinds of possible global recession, high inflation and interest rates and Covid resurgence doesn't become a spoilsport." Realtors' apex body CREDAI's President Harsh Vardhan Patodia said he expects "strong and positive momentum to prevail in the Indian real estate market".

The International Monetary Fund has projected the global economy to shrink by 0.2 per cent in 2023. This would mean investment flows to developing economies from rich nations will slow. Many emerging markets and low-income countries are already facing pressures from a depreciating currency, capital outflows and inflation.

With the inflation battle yet to be won, economists expect the Reserve Bank of India (RBI) to raise interest rates further at least in the first half of next year.

According to Anarock, 2022 housing sales in primary markets (fresh sales) across seven major cities stood at nearly 3.65 lakh units, an all-time high, up 54 per cent from 2,36,500 units last year.

Sales of residential properties stood at 2,61,360 units in 2019 (pre-Covid) and 3,42,980 units in 2014 across seven cities -- Delhi-NCR, Mumbai Metropolitan Region (MMR), Chennai, Kolkata, Bengaluru, Hyderabad and Pune.

The demand growth was secular and broad-based in nature, as sales increased across all price points, from low-cost homes to luxury villas, undeterred by hardening of interest rates on home loans as well as property prices.

Home loan rates have gone up since May this year from a decade-low of around 6.5 per cent.

Resurgence in demand coupled with rise in input costs, prompted real estate developers, who were working on a very thin margin from the last several years, to increase their selling prices.

Housing prices, which remained stagnant for the last several years, saw a modest appreciation of an average of 4-7 per cent across these top seven cities.

There was a sharp increase in prices of key raw materials like cement and steel in the first half of this year because of geopolitical concerns amid the war between Russia and Ukraine. Prices of steel have eased now but many other commodities remain costlier.

The residential real estate market saw further consolidation this year in both demand and supply towards branded and trusted developers. Real estate projects from reputed corporate houses like Tata, Mahindra, Godrej, Piramal Group and Adani gained further traction.

Almost all listed realty firms reported a sharp rise in their annual sales bookings in every quarter this year, encouraging them to aggressively expand their land bank for future development through outright land purchases and partnerships with landowners.

Bengaluru-based Prestige Group, Mumbai-based Macrotech Developers (Lodha Group), Godrej Properties and DLF are in the race to become the top listed entity in terms of sales bookings this fiscal year.

Struggle for unbranded players, lacking credibility, further exacerbated. Many of those realty firms became bankrupt as well and went into insolvency proceedings. The resolution of debt-laden Jaypee Infratech did not see light of the day even this year.

Like the housing segment, the other verticals of Indian real estate -- office, malls, co-working, co-living and industrial & warehousing spaces -- witnessed a strong revival.

As per property consultancy JLL India data, net absorption or leasing of office space rose 46 per cent to 38.25 million square feet this year from 26.2 million square feet in 2021. The net leasing, however, could not reach the pre-Covid level of record 47 million square feet in 2019.

The gross leasing of office space, as per property consultancy Colliers India data, is likely to rise 52 per cent to 50.1 million square feet in 2022 across six major cities as demand from corporates rose. Large enterprises also actively took office space in co-working centres as part of their strategy to save on capital expenditure and adopt flexibility.

However, the gross absorption of office space may fall to 35-38 million square feet as corporates, both foreign and domestic, have become cautious in expanding business amid global headwinds.

In the co-living segment, the operators heaved a sigh of relief with the opening of offices and educational institutions after Covid cases receded sharply earlier this year.

To make up for the loss of business in the last two years, the co-living operators are expanding their operations aggressively.

Meanwhile, this year saw a 17 per cent drop in private equity investment in real estate to USD 5.13 billion as investors turned cautious amid geopolitical and inflationary concerns. The real estate sector saw many big deals, especially in the office and warehousing segment.

In 2022, builders had a reason to smile as the real estate sector remained strong after overcoming a plethora of disruptions during the past six years in the form of demonetisation, implementation of RERA and GST, NBFC crisis and the pandemic.

The domestic realty sector, which is projected to be worth USD 1 trillion by 2030, is the second biggest employer after agriculture and supports around 200 other industries.

Builders are confident of not only repeating their performance but bettering it, if the pandemic and inflation remain under control in the country.

"The sustained home buying demand buoyancy may dip if interest rates cross the upper tolerance limit of 9.5 per cent, leading to demand contractions," Niranjan Hiranandani, National Vice Chairman of realtors apex body NAREDCO, said.