Published on 19/07/2021 11:26:17 AM | Source: ICICI Securities

Real Estate Sector Update - Residential market to see continued recovery in FY22 By ICICI Securities

Posted in Broking Firm Views - Sector Report| #Real Estate Sector #Sector Report #ICICI Securities

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Residential market to see continued recovery in FY22

We recently hosted Mr. Anuj Puri, Chairman of Anarock Property Consultants for a Fireside Chat on India’s residential real estate market. Key takeaways are: 1) Residential sales have again picked up momentum in the second half of Jun’21 and are back to levels seen in Sep’20 (50% of pre-Covid levels) and are set for a strong bounce back in H2FY22 similar to the pattern seen in FY21; 2) The consolidation story in favour of larger, organised players is expected to accelerate further and pan-India market share for these developers is expected to increase to over 60% in FY23E from 40% in FY21; 3) The Development Manager (DM) model is increasingly becoming an attractive proposition for larger developers as stress for smaller developers/land owners has increased and offers a low risk and scalable business model; and 4) Price hikes of 6-7% taken in completed projects are being supported by demand while rising input costs may result in higher prices of 4-5% in new launches of organised developers.


Consolidation story to continue in residential space over FY21-23E:

As per Anarock, the pan-India residential market share of large, organised listed and unlisted developers has grown to ~40% in FY21 from 17% in FY17 as a number of events such as demonetisation, RERA/GST, NBFC funding crisis and Covid has led to home buyers shying away from projects of unorganised players. This consolidation is expected to accelerate further with the market share of organised players moving to over 60% by Mar’23. Buyers continue to prefer ready-to-move homes and new launches only by leading developers with prices in select projects seeing a marginal price increase depending on demand.


Development Manager model becoming an increasingly attractive proposition:

While Joint Ventures and Joint Development (JV/JDA) have been around for over a decade as preferred modes of development, especially in South India, the Development Manager (DM) model is being seen as an increasingly attractive proposition for larger, organised players as it offers a less capital intensive and low risk model of scaling up operations. With many projects/land parcels of smaller developers/land owners still in the hands of NBFCs, the larger developers are being approached to take up these projects (this excludes stuck projects). For an organised developer, they get a direct share of the revenue without having to commit funds for construction. Going ahead, the share of DM projects is expected to be a larger pie of organised developer portfolios.


First signs of residential demand reviving seen from June 2021:

With the impact of the second wave gradually reducing across India, residential sales have also seen a pickup from the second half of Jun’21 onwards and are at around 50% of pre-Covid levels, similar to levels seen in Sep’20. While FY21 saw the Apr-Aug’20 period seeing a virtual washout for residential sales, the rebound is expected to be quicker in FY22 and volumes may recover to pre-Covid levels from Q3FY22 onwards, along similar lines of FY21. Low mortgage rates and muted price hikes will continue to support demand along with availability of ready to move inventory.


Price hikes in select projects, rising input costs a key monitorable:

Developers have taken price hikes of 6-7% in FY21 in select ready-to-move projects which is a function of available inventory in the project and micro-market. With rising input costs of materials, new launches by developers are expected to factor in higher selling prices of 4-5%. However, robust demand at these higher prices may only be seen in projects of larger, organised developers with a strong track record of timely delivery.


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