Record high real estate inventory an opportunity not a concern, as sales, demand stay robust

Listed real estate companies outperformed the industry over FY20-23, which led to increased market share

Listed real estate companies outperformed the industry over FY20-23, which led to increased market share

India’s real estate sector has recovered robustly following challenges posed during the pandemic and homebuyers losing trust because of delayed projects and fraud by some developers. Housing sales in eight major cities grew to a six-year quarterly high in July-September on strong demand, allowing developers to regain lost ground, according to Knight Frank data. However, some recent reports have highlighted an increase in inventory levels.

Realty inventory has surged by 28 percent on-year in the first half of the current financial year, propelling the combined value of unsold homes of leading listed companies to a record high of more than Rs 1 lakh crore, as per a media report. This amount is equivalent to 33 months of sales at the current pace. According to experts, a majority of this inventory is on account of new product launches, which is not a concern but an opportunity.

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While inventory is at a record high, there are pockets in the country where the level of unsold homes has been declining. Unsold housing inventory across tier 1 cities dropped to 508,000 units in the third quarter of calendar 2023 from 526,000 units in Q2, according to a report by PropEquity. In the National Capital Region, which includes New Delhi, Noida and Gurugram, the unsold housing stock dropped by 7 percent. Developers are strategically prioritising the sale of older inventory while launching fewer new projects.

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Opportunity or burden?

Inventory levels have risen over the past year, breaking a 10-year trend of declines until 2022. The increase is due to a robust product launch momentum, while there is a limited portion of older inventory, according to Vivek Rathi, national director of research at Knight Frank India. Currently, the market is carrying inventory that will be exhausted in under two years. This indicates projects are being sold before completion of construction, instilling confidence in developers, Rathi told Moneycontrol.

Over the past few years, amid consolidation in the real estate sector, the gross sales of the nine leading listed developer companies have risen significantly. Their sales escalated to Rs 68,000 crore in FY23 from Rs 18,000 crore in FY17, according to ICICI Securities. Additionally, an update from Jones Lang LaSalle (JLL) showed that Q3 of CY23 marked the highest quarterly residential sales since 2008. Residential sales in the initial nine months of 2023 have already achieved 91 percent of the sales recorded in CY22, indicating recovery, especially in the face of increased mortgage rates.

The JLL report highlighted that despite the rise in unsold inventory, the expected time to sell decreased to 2.3 years in Q3 of 2023 from 2.5 years in Q2 of 2023, signalling strong sales. Considering the sales growth momentum, “If the combined inventory of top listed companies is over Rs 1 lakh crore, then it doesn’t appear to be of great concern,” said Ashish Khandelia, founder of Certus Capital and Earnnest.me.

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Possessing a high inventory is considered valuable in the current scenario as consumers actively seek these offerings, according to Knight Frank’s Rathi. Holding inventory becomes a concern in a down cycle, as prices may stagnate or continue to decline, creating a drag on project viability. “In a scenario like the present… it is generally advantageous for developers. This is because consumer enthusiasm is strong and input prices are also on the rise, providing a sense of higher value in sales,” Rathi added.

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Momentum is key

Sales are strong, product launches are even stronger, ensuring a marginal uptick in inventory levels, Rathi told Moneycontrol, adding that as long as the sales momentum is sustained, high inventory won’t pose a problem. “Trouble will arise only if sales momentum is being swayed by a significant margin, which is not expected right now,” he added.

Listed real estate companies outperformed the industry over FY20-23, which led to increased market share. They have a strong launch pipeline, indicating a robust plan for future projects, and their expansion strategy anticipates further growth in their market share, said Narendra Solanki, head of fundamental research at Anand Rathi Shares and Stock Brokers. However, he highlighted the risks posed by high inventory levels.

“During excess supply, properties may take longer to sell or lease. Extended time on the market can increase holding costs for property owners and developers. Developers who invested in projects based on optimistic demand projections may face financial strain if the market experiences extended periods of excess supply,” he said.

Bounce back from pandemic blues

The real estate market in India has bounced back from the lull of the past few years. Luxury home sales in the National Capital Region, Pune and Hyderabad jumped about two times in the July-September quarter. Mumbai also recorded healthy property registrations, according to an Anarock report. The Mumbai Metropolitan Region (MMR) saw a 46 percent annual rise in overall housing sales, while Pune saw a massive 63 percent yearly jump, and NCR a 6 percent annual rise.

The premium and luxury housing segment has gained momentum, and launches reflect the growing demand for larger homes with better amenities and specifications. The luxury segment, comprising units priced Rs 4 crore and above, maintained a strong sales momentum in the January-September 2023 period, registering a 97 percent on-year increase, according to CBRE’s India Market Monitor Q3 2023 report.

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Affordable segment

Meanwhile, the affordable and mid-price (below Rs 1.5 crore) segment has declined recently. In the past decade, affordability continued to improve until H1 of 2021. Since then, affordability has deteriorated mainly on account of the increase in home loan interest rates by 180 to 190 basis points.

Vivek Rathi said that in the affordable housing segment, where many depend on mortgages, it’s tough for buyers to handle a higher down payment than planned. For homes in the Rs 30 to 40 lakh range, a 2 percent increase in home loan rates puts many buyers outside the bank eligibility criteria.

However, a rate decrease can significantly boost this segment. Looking at the market scale, the collective mid- and premium segment demand in India is for 15 lakh to 30 lakh housing units. On the other hand, demand in the affordable segment is for 2 crore to 3 crore houses. “To tap into this scale, a catalyst like a fiscal stimulus, lower interest rates, or other support is crucial,” Rathi said.

The residential cycle remains strong, according to Khandelia of Certus Capital. “We are in the third year of the housing cycle. Cycles typically last 7-9 years. Fundamentals for the residential sector remain underpinned by a) strong project execution focus; b) best affordability levels in the last decade or so; c) low speculative activity, and d) strong economic growth. Further, the increase in mortgage rates has been absorbed well,” he told Moneycontrol.

Crafty plays

Morgan Stanley remains bullish on real estate and believes the upcycle could turn into a multi-year phenomenon aided by strong macros and a favourable industry structure. The brokerage raised its price target for Prestige Estates and DLF to Rs 1,300 and Rs 770, respectively, as it retained its ‘overweight’ call on the stocks. The share price targets of Macrotech Developers and Godrej Properties, both of which enjoy ‘equal-weight’ ratings from Morgan Stanley, were revised upwards to Rs 960 and Rs 2,050, respectively.

Also Read | Morgan Stanley expects real-estate upcycle to continue, raises price target of these 5 stocks

There’s considerable potential in the real estate market, but a cautious approach is essential in selecting investment avenues, according to Aishvarya Dadheech, founder of Fident Asset Management. After the recent rally, the risk-reward balance may not be highly favourable. Still, there’s a belief in the opportunities within the real estate sector. For those looking to invest in real estate without assuming significant risk, a suggestion is to consider investments in related sectors such as tile, plywood, or paint companies, Dadheech told Moneycontrol.

These sectors serve as proxies for real estate, offering better quality management, stronger balance sheets, and clearer growth visibility, mitigating the typical volatility associated with real estate. This provides a safer alternative for risk-averse investors. For those already invested in real estate, there’s a personal belief in the sector’s continued growth potential, he added.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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