India's Housing Market Remains Sluggish in 2011

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Ashutosh Limaye, Head of Research & Real Estate Intelligence for Jones Lang LaSalle India tells the World Property Channel, "As India's economy shows signs of decreasing GDP growth rate, the residential real estate industry faces its own share of issues. Residential sales remained slow in most of India's cities in 2011 while new residential project launches also showed a marked slowdown in the third quarter."

Residential sales dropped in the prime cities of India, except in Bangalore, which saw healthy sales. In Delhi NCR, the Noida sub-market had led absorption over the past 11 quarters but witnessed a decrease in 2011.

Cautious buyer sentiment prevailed due to the adverse impact of the prevailing macro-economic factors such as rising interest rates and surging inflation. The spate of hikes in interest rates by the Reserve Bank of India (12 times over the past 18 months) led to a steep rise in the EMIs of home loan borrowers.  While rising home loan rates have exerted pressure on buyers, developers have been constrained by the rising costs of construction and debt. We are now looking at a scenario where both developers and buyers are impacted by adverse macro-economic factors.

Rising input costs caused developers to slow down on construction and new launches. Most of new launches in 2011 were in the mid-income and budget homes segment. Capital values increased to a limited extent. Although brochure prices either remained stable or increased marginally in select projects, developers offered discounts on their prices or other freebies during the festive seasons to improve sales.

India 2012 Residential Forecast

Because of the prevailing uncertainties on the global market and the likelihood of further interest rate hikes by the RBI in the early part of 2012, sentiments on the residential market will remain cautious over the short term. The absorption rate - meaning the ratio of sales over inventory in the market - is likely to be low, and the incidence of new launches will decline. Rise in capital values will be marginal because of low sales.

Project-specific price increases can be expected across all sub-markets - this pertains specially to projects that are being delivered or are nearing completion. The mid-end and affordable housing segments will record healthy appreciation in capital values in the short term from a low base. We expect these trends to continue during 4Q11 and 1H12.

Overall macro-economic conditions will keep investor sentiments at cautious levels, both in terms of FDI and FII.  FDI inflows, which are currently muted because of the slowdown in the country's GDP growth rate, will probably remain sluggish over the short term. However, as the Indian economy continues to show its resilience in 2012, foreign investors will gain in confidence and India will become attractive among competing investment destinations.

Meanwhile, residential developers will continue to tackle the current liquidity crunch due to high interest rates and slow sales. We will see a slowdown in construction activity for the time being. However, as demand improves, improving sales will benefit developers who will focus on execution of their on-going project portfolios.

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