Economic crisis and impact on realty sector

The recovery of the Indian economy has once again come under cloud with key economic indicators like Current Account Deficit (CAD) and consumer inflation remaining above the comfort level of the Reserve Bank of India (RBI).

While CAD reached a high of 6.7% of GDP in the December 2012 quarter, consumer price index grew at 10.2% in April 2013. Both these indicators are set to deteriorate further as the Indian currency has depreciated sharply against the US Dollar

(USD) in the last one quarter.

The Indian Rupee has changed from Rs 54.4/USD in April 2013 to Rs 59/USD in June 2013 resulting in an 8.5% fall. Such a fall will make imports more expensive resulting in higher CAD and consumer inflation. The worsening macroeconomic condition is expected to delay the reduction of policy rates by the RBI thereby deferring the much-needed monetary stimulus for bringing back the domestic economy’s growth on the right track.

Real estate market has a very strong linkage with the economic growth of a country and any signs of a slowdown in the domestic economy can have a cascading effect on the health of the realty market. Among the various segments of the real estate market, office, retail and hospitality are relatively more prone to the vagaries of the macroeconomic situation as compared to the residential segment.

The primary reason behind this is the stark difference between rationales behind the purchase decision of a residential property as compared to other real estate segments. While there is an economic consideration for buying retail, hospitality or office property with the primary objective of using it for carrying out business activities, purchase decision for a residential property is generally driven by a totally different set of motives.

Factors such as affordability, proximity to the employment hub, presence of physical & social infrastructure, sentimental value attached to a locality and community consideration among others can have an overbearing impact on the buyer’s decision. Since many of these factors vary from one city to another, movement in the residential market is often divergent for each city. 

Analysis of the weighted average price trend in the   top six residential markets of the country namely Mumbai, the NCR, Bengaluru, Chennai, Hyderabad and Pune can help in understanding the varying characteristics of the residential market in each of these cities. Cities like Mumbai and Chennai, which are land locked from one side by the sea, have the highest weighted average price of Rs 5,900/sq.ft. and Rs 4,500/ sq.ft., respectively.

The unique topography of these two cities has ensured restricted supply of land resulting in high prices for residential properties here. While the weighted average price in Mumbai city is much higher at Rs 14,400/sq.ft., it goes down to Rs 5,900/sq.ft. for the entire Mumbai Metropolitan Region which also includes areas such as Thane, Navi Mumbai, Mira- Bhayandar and Vasai-Virar.

Demand for the domestic IT/ITeS industry over the last five years. Strong performance by the manufacturing, BFSI, IT/ITeS and other service sectors resulted in high demand for office space across the country during the last five years. A total of 168.5 mn.sq.ft. of office space was absorbed from 2008-2012 across six major cities namely Mumbai, National Capital Region (NCR), Bengaluru, Pune, Chennai and Hyderabad. IT/ITeS sector was the primary demand driver of office space in cities like Bengaluru, Chennai, Pune and Hyderabad accounting for more than 50% of the total absorption.

 

However, demand in Mumbai and the NCR was driven by a relatively diverse set of sectors as a large number of occupiers prefer to locate their corporate offices here.