Deepak Parekh, Chairman, HDFC Limited
Post- Covid, housing continues to be a big star of the real estate sector. I hardly need to reiterate that the demand for housing in India continues to remain extremely robust. The greatest mark of confidence has been the strong pipeline of new launches, surpassing pre-pandemic levels. The demand for housing continues to be from both, first-time homeowners as well as those moving up the property ladder – generally into larger homes or houses in other locations.
Residential real estate has staged a strong come back and from hereon it will be even stronger. We have the best of housing affordability today. And I can unequivocally say that going forward, this affordability will not get impacted. The demand for housing continues to be very strong simply because the desire to own a home is so immense and there continues to be a huge housing shortage. The mortgage to GDP ratio in India at 11% is still very low. If one looks at the cohort of those working in sectors like IT, e-commerce, professional services, financial sector or those working in large companies, or the breed of new age entrepreneurs, income levels certainly have risen. In India as income levels rise, one will see younger people affording a house sooner in life. Considering the trend that incomes are rising faster than real estate prices, affordability should not get impacted.
What is the road ahead for home prices Will housing prices increase from here on? There was a time when many developers refused to get a reality check and recognise that their price points were not viable and that’s why they ended up with unduly large unsold inventories. I hope we have overcome these issues now. In certain high-end premium projects, one has already seen a price rise of 15 to 20%. But it is important to understand that this is not the case across the board. Barring a few metro cities, prices in the affordable housing segment have been stable. The sweet spot for housing is still in the price range of Rs 5 million to Rs 10 million.
An encouraging trend is that there is now greater confidence to once again opt for under construction properties – at least with those developers who have a strong track record of delivering projects on time as opposed to only a preference for ready-to-move-in properties. So even if certain pockets across the country witness a small price uptick, this can be absorbed. What one needs to closely watch out for is the rising cost of building materials. if there is a continued rise in the costs of building materials, this could get passed on to the homebuyer. There are, however, measures that can lessen this impact such as facilitating shorter construction cycles, ensuring faster approvals and enabling credit input on goods and services tax for under-construction properties. This would particularly help affordable housing projects.
Today, we are clearly at the bottom of the interest rate cycle, but there is sufficient confidence in the central bank that any increase in interest rates if at all from hereon will be calibrated and non-disruptive. The RBI has articulated that growth will continue to remain a priority and the RBI has also indicated that despite inflation currently being at the upper band of its target range, it will be manageable and the RBI at this juncture envisages some easing of prices going forward. Further, it is important to understand that a housing loan is a long-term loan. Over this period, interest rate cycles may move up and down. A customer who wants a home will not hold back because interest rates inch up slightly.
The government has continued with the tax incentives on home loans which also helps reduce the effective rate paid on a home loan. The reason why this concern has arisen is that since banks have moved to the external benchmark or repo-linked loans, there hasn’t been an upward increase in the benchmark policy rates so far. But rest assured, this will not be a dampener for home loans. Do remember, we have seen home loan rates as high as 17-18% in the past. Today, interest rates are still at historic lows, so a minor increase will not have an impact on the demand for home loans.
Talking of commercial real estate, the jury is still out on the workspace – work from home, return to work or having a flexible work model going forward. Perhaps all three options may co-exist. Yet, the broader point is that whatever be the chosen option, it remains a positive for the real estate sector. Hardly any large offices have given up their commercial premises. In fact, a fresh supply of office space across the major metro cities is expected to be in the region of 45 million square feet this year and an estimated quarter of this new supply is already pre-leased. This of course, is largely stemming from the IT, e-commerce and professional services space. Rentals have so far been fairly stable, but there could be a slight uptick in certain premium projects.
India has for long been recognised as the back office of the world. Today, riding on the back of India’s strong IT capabilities, new real estate opportunities are emerging in the form of growing demand for data centres. India is positioning itself as a data centre hub. This not only is an opportunity that many large developers are capitalising on, but it is also going to generate thousands of new jobs and there is going to be a huge premium for such talent. Data centres are of strategic importance. In the recent union budget, data centres have now been accorded infrastructure status. This in turn would facilitate increased access to credit at more favourable terms.
Another area that has been growing rapidly is the warehousing and logistics segment and demand for this is led by the boom in e-commerce and logistics. Around 46 million square feet of tech-driven warehousing space is expected to be developed in the next financial year, representing a 2-year CAGR of over 20%. Again, demand for modern warehousing facilities will receive a shot in the arm following the union budget announcement of the setting up of multimodal logistics parks, along with urban transportation infrastructure. This will give a further boost to the logistics sector across the country.
Undisputedly India’s strong demand for housing is staying and within the real estate landscape, two key trends are emerging. First is prop tech which is changing the real estate landscape. Construction technology is at an exciting juncture with 3 D printing, Building Information Modelling, and Pre-cast construction technologies amongst others. Don’t underestimate the power of India’s start-ups and even home improvement technologies are going to see a lot more innovation going forward.
The second aspect that calls for increased focus is ESG. All incremental funding is perforce going to have ESG covenants embedded in it. It is important that the construction sector in India stays ahead of the curve especially on working towards a lower carbon footprint and reduced emissions. The sector has to be able to demonstrate greater efforts towards increasing the stock of green buildings.
To conclude, I am confident the real estate sector in India will see even better days ahead. But, there is no substitute for prudence and no allowance for excessive greed. The reputation of real estate players and their track record of timely delivery is what will ensure a long-term sustainable business ahead.