Real estate market sentiments turn pessimistic, sink to demonetisation period lows: Report

Real estate sentiments have plummeted in the July-September quarter of 2019 (Q3 2019), to levels previously seen during the demonetisation period, according to a report by Knight Frank, FICCI and NAREDCO

Despite a slew of measures to arrest the slump, by the government and the Reserve Bank of India (RBI) to boost liquidity and revive demand, a latest survey by Knight Frank, FICCI and NAREDCO, titled ‘Real Estate Sentiment Index Q3 2019’, shows that the current sentiments of the real estate stakeholders in India has plummeted further to 42 in the July-September quarter of 2019 (Q3 2019) from the preceding quarter – a level previously seen during the heightened uncertainty period of pre-election in the first quarter of 2014 and the demonetisation period (41) in the last quarter of 2016. The report further indicates that the future sentiment, or the outlook for the coming six months, has also turned ‘pessimistic’ for the first time since the inception of this survey, a clear indication that the sector is under immense pressure. However, sentiments toward the commercial real estate sector have remained steady, with the outlook for new office supply strong, for the coming six months. A score of over 50 signifies ‘optimism’ in sentiments, a score of 50 means the sentiment is ‘same’ or ‘neutral’, while a score of below 50 shows ‘pessimism’.

 

Real estate market sentiments turn pessimistic, sink to demonetisation period lows: Report

 

Current sentiment score

  • The stakeholders continue to be pessimistic and wary, owing to the overall economic slowdown and the slump in domestic consumption demand.
  • Drying credit flow to developers, due to the NBFC crisis and slowing down of the economy at 5% in the June quarter (a five-year low), have all negatively impacted the current sentiment scores.
  • Measures taken by the government, such as the slashing of corporate tax rate to 22%, the liquidity support to HFCs and NBFCs and the creation of a stressed asset fund (AIF) of Rs 20,000 crores to boost liquidity and revive demand, have failed to infuse confidence in the market, thus, further downgrading the current sentiment score.

 

Future sentiment score

  • Dropping to an all-time low at 49 in Q3 2019, the future sentiment index score is a clear indication that the sector is under pressure.
  • The real estate industry has been in the doldrums for over three years now and the stakeholders see no immediate solution to the sector plagued with defaults, weak demand and the drying up of funding, because of the NBFC crisis. The restricted flow of liquidity has resulted in many real estate projects being stuck in the past one year, due to lack of funds. Along with the above, the realisation that the slowdown in the economy will further weaken the demand and in turn impede cash flow issues for the developers, has marred the outlook of the stakeholders for the coming six months.

 

“The real estate stakeholders’ sentiment has gone in the ‘pessimistic’ zone for the current quarter, owing to poor demand-side performance, despite a plethora of measures by the government. However, it is more significant to note that, for the first time, the stakeholders are wary about the future six months for the real estate sector and the overall economy, thus, pushing the sentiment score in the red. While measures have been announced by the finance minister in this quarter, attempting to sort out the supply-side challenges, however, these measures are mostly focused on the affordable housing segment, leaving out the vast majority of ‘non-affordable’ housing from the announced benefits. These measures have not helped infuse confidence in the stakeholders, as the real challenge lies on the demand side, where end-users are unwilling to make home purchases owing to lack of financial confidence. The supply-side sops will not be enough, till the time demand is revived by putting money in the hands of the consumer and his confidence is restored,” said Shishir Baijal, chairman and managing director of Knight Frank India.

 

Zonal future sentiment score: North remains pessimistic, west nosedives

The future sentiment score for the real estate sector’s performance in the north, continues to be in the pessimistic zone (48) for the second consecutive quarter in 2019, though marginally improving from the preceding quarter of Q2 2019.

This north zone’s crisis has rubbed off on the west zone, with its sentiment score going in the ‘red’ for the first time. The future sentiment score in the west has been on a constant decline since Q4 2018 (62) and is at the lowest (45) in the Narendra Modi government regime.

 

Real estate market sentiments turn pessimistic, sink to demonetisation period lows: Report

 

Stakeholder future sentiment score: Developers pessimistic, lenders not too optimistic

Real estate developers are pessimistic regarding the revival of the sector in the coming six months, with the future sentiment index score going in the red in Q3 2019 at 47 points, an eight-quarter low, due to the liquidity crunch, high borrowing cost and inventory overhang.

The future sentiment score of 51 of the financial institutions, is also the lowest since the Modi government came to power. The liquidity crunch, brought about by defaults of the IL&FS Group, have cautioned the lenders against their exposure to the real estate sector. Plummeting to a 22-quarter low, the lenders are exercising caution for the coming six months.

 

Real estate market sentiments turn pessimistic, sink to demonetisation period lows: Report

 

Economic outlook and funding scenario: Synchronised slowdown in the economy and cautious funding on the cards

 

Real estate market sentiments turn pessimistic, sink to demonetisation period lows: Report
Real estate market sentiments turn pessimistic, sink to demonetisation period lows: Report

 

  • The real estate industry’s sentiment regarding the economy has remained cautious in Q3 2019, with 63% of the stakeholders opining that the economic situation will be the same, or may even worsen, over the next six months.
  • The wary outlook comes on the back of strains in the overall economic scenario, dotted by issues such as the US-China trade war, hovering geopolitical stress due to Brexit and domestic factors like a slowdown in consumption and investment and the tightening on the borrowing ecosystem.
  • Echoing the overall market sentiments, stakeholders maintain a conservative outlook for the funding scenario, with 73% expecting it to worsen in the next six months. The stakeholders see it as a long period of adjustment and hint at exercising caution, in lending to troubled sectors such as real estate, automobile and other consumption-driven sectors that are witnessing a slump in demand.

 

Residential property market outlook: Sector seeks a lifeline

The outlook for residential new launches, sales and price appreciation, have yet again taken a hit in Q3 2019, clearly stating that the slew of measures taken by the by the government have not infused any confidence in the stakeholders.

 

Real estate market sentiments turn pessimistic, sink to demonetisation period lows: Report
Real estate market sentiments turn pessimistic, sink to demonetisation period lows: Report
Real estate market sentiments turn pessimistic, sink to demonetisation period lows: Report

 

  • A majority 67% of the stakeholders have maintained that given the weak demand, due to a cautious sense on the overall economy, stagnant job market and the apprehension to spend, the residential sales will either remain tepid or may even go down further in the coming six months.
  • Sentiment regarding residential price appreciation also looks grim, with 86% of the stakeholders opining that prices will remain at the same levels or even drop further in the coming six months.
  • Taking cognisance of the slack in the sector, the RBI has cut the repo rate by 25 basis points for the fifth consecutive time in the year, effectively bringing down the repo rate by an aggregate of 135 basis points. However, the stakeholders have expressed concern on the effective transmission of this rate cut to retail consumers, in the form of discounted credit.

 

“We had several crises in the past, including the fiscal changes undertaken by the government. However, on the backdrop of credible real indicators, we anticipate a large increase in overall housing demand over the next 12 months. The biggest considerations are house prices and interest rates, which have significantly turned in favour of buyers. House prices for both, the under-construction, as well as the ready possession segment, are the lowest in the recent past. Similarly, home loan interest rates are at the lowest level ever, even as the RBI is working on better transmission of rate cuts. The unfolding of such an opportunity ensures that we are looking up to a much stronger market in times to come. From the supply side, with the short-term liquidity squeeze prevailing in the economy, even positive net worth companies across industries are turning into negative balance sheet. This is one important area that needs immediate attention. The current economic scenario makes it the right time for the RBI to announce its one-time rollover scheme, similar to what was rolled out during the Lehman crisis in 2009,” said Niranjan Hiranandani, national president of NAREDCO and founder and MD of Hiranandani Group.

 

Office market outlook: Sector holds steady

  • Sentiment regarding the outlook for the new office supply is strong, with 82% of the respondents believing that the coming six months will see new supply additions, across the major office markets in the country.
  • The outlook for the office leasing activity remains unchanged in Q3 2019, with 79% of the stakeholders opining that leasing activity will remain steady, or may even improve in the coming six months.
  • Stakeholder outlook with respect to future rental appreciation dipped in Q3 2019, with 79% of the stakeholders expecting rents to either remain stable or inch upwards, as against the thumping 87% in the preceding quarter. The sentiment, however, is in the positive zone and stakeholders expect rents to inch up, for quality office spaces.

 

Real estate market sentiments turn pessimistic, sink to demonetisation period lows: Report
Real estate market sentiments turn pessimistic, sink to demonetisation period lows: Report

 

According to Sanjay Dutt, MD and CEO of Tata Realty & Infrastructure Ltd and chairman of FICCI real estate committee, it is time for a quantum leap, vis-à-vis policy planning and implementation.

“The government needs to ensure a stable, predictable and business-friendly environment that not just ensures economic growth but also leads to job creation and income stability. Further, moving beyond the accolades of signed MOUs, fast track efforts should be put in place, to ensure deployment of committed investments. Accelerated use of digitisation is one aspect that can meaningfully lift the current constraints and improve efficiencies. We should aim to build an India that stands for both, ‘ease of doing business’ and ‘sustain profitable growth’,” he concludes.

 


Real estate stakeholders express confidence in the residential sector for the coming six months: Report

The increase in the exemption period on inventory tax announced in the budget and a rationalisation in GST rates, have contributed to improving stakeholders’ sentiments towards the housing market, according to Knight Frank’s Sentiment Index

May 14, 2019: The Indian real estate sector has expressed optimism in the first quarter of 2019, as per Knight Frank’s Q1 2019 Sentiment Index Survey. The Real Estate (Regulation and Development) Act, 2016 (RERA), exemption of inventory tax from one to two years in the union budget of 2019 and the Good and Services Tax (GST) rate rationalisation, have contributed to boosting the current stakeholder sentiments, the report said. The current sentiment score, developed jointly by Knight Frank India, FICCI and NAREDCO, has inched 5 points upwards from the preceding quarter and remains in the positive in the first quarter of the new calendar year. The market sentiments that had waned during 2017, with the various structural changes in the real estate sector, have bounced back and have been steadily improving since.

Real estate stakeholders express confidence in the residential sector for the coming six months: Report

Key findings of the Sentiment Index

  • The future sentiment score maintains its positive spell and has moved up to 63 points in Q1 2019. Stakeholders are of the opinion that the transparency brought in by the enormous structural reforms, have fundamentally changed the dynamics of the real estate sector for the better. The stakeholders are positive of the outcome of the government’s efforts to ease the burden of developers, by acknowledging the slowdown in the sector. This has boosted the stakeholder sentiments for the coming six months.
  • The rationalisation of the GST rate to 5% for under-construction flats and 1% for the affordable housing sector, have also played a significant part in bolstering real estate sentiments for the coming six months.

Shishir Baijal, chairman and managing director, Knight Frank India said: “The Sentiment Index for residential has shown optimism, which can be easily interpreted to understand that development companies are looking towards a revival of the sector. This growth in demand is expected, despite the impending elections results, demonstrating confidence of the supply side that the structural changes introduced in the last few years, will start to show their results in the year forward.”

Residential sector hopes to see demand revival

Real estate stakeholders express confidence in the residential sector for the coming six months: Report
Real estate stakeholders express confidence in the residential sector for the coming six months: Report
Real estate stakeholders express confidence in the residential sector for the coming six months: Report
  • With positive steps being taken by the government and the banking regulator, a majority of the stakeholders have expressed optimism and expect policy interventions to translate into new residential launches and sales in the coming six months.
  • While 87% of stakeholders have opined that the sector will see new launches in the coming six months, a substantial 85% of them have opined that the filtering in the sector, with respect to the organised and unorganised developers, will positively translate into demand in the coming six months.
  • Stakeholders believe that the reduction in the repo rate by 25 basis points, will boost sales and ease liquidity for the real estate sector. It needs to be noted that this recent reduction in policy rates, is the second consecutive rate cut by the banking regulator and the repo rate now stands at 6%.
  • Riding on the positive sentiments, the future sentiments, with respect to price appreciation, have also showed some positivity in Q1 2019. Improving from the preceding quarter, a majority of the stakeholders have opined that the residential prices will either remain in the current range or may even inch upwards in the coming six months.

 See also: Housing launches rise in Q1 2019 by 17% in southern India cities, led by Bengaluru: Report

Zonal sentiment score

The future sentiment score for the north has regained optimism and is in the positive side in Q1 2019, after going in the red in the preceding quarter.

Real estate stakeholders express confidence in the residential sector for the coming six months: Report

Score>50: Optimism; Score=50: Same/Neutral; Score<50: Pessimism

Source Knight Frank Research

  • The stakeholders opine that although the market is reeling under inventory pressure and low buyer confidence, what brings respite is that now, all developers have aligned their business with RERA and GST, which is leading to the rapid consolidation and filtering of the market in Gurugram in Haryana and Noida and Greater Noida in Uttar Pradesh, which form the major portion of the real estate chunk of the national capital region.
  • Stakeholders from the south, east and west zones have always remained in the optimistic zone for the past many quarters and continue their momentum in the first quarter of 2019, as well.

Stakeholder sentiment score

Real estate stakeholders express confidence in the residential sector for the coming six months: Report

Score>50:Optimism; Score=50: Same/Neutral; Score<50: Pessimism

Source Knight Frank Research

The sentiment score of the developers for the coming six months, has significantly inched upwards in Q1 2019. Over the past quarter, the real estate sector has witnessed changes like the implementation of the new GST structure, exemption from paying notional rent and the incentivised push to affordable housing that have helped in positively impacting the market sentiments.

Coupled with this, the stakeholders see the reduced repo rates as a positive move by the banking regulator, which will provide the developers with the much-needed funds to execute their projects and also give a boost to sales, by attracting the fence-sitting buyers.

Sentiments of the financial institutions for the real estate scenario for the coming six months, have remained somewhat steady in Q1 2019 and are in line with the preceding quarters.

 

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