Residential Real Estate: Markets easing slowly, treading on the recovery path

It is a well-established fact that the residential real estate market is in turmoil today. Real estate investors burning their hands in the erstwhile “sure bets” like the National Capital Region (NCR) and buyers getting stuck with under-construction projects for years are common features of the industry. Even blue-chip investment-grade residential markets like Mumbai have experienced a phenomenal drop in sales and stagnation in prices over the past three years. The last three years have witnessed big names taking serious hit on their brand equity and by all accounts there is no respite in sight. Several international property consultants have been coming out with their market prognosis based on price (de)growth, unsold inventory and the number of quarters required to sell the same. These range from a prolonged time correction to doomsday scenarios. So how bad is it for developers today?

The number of quarters required to sell unsold inventory (QTS) is an important indicator of market activity as it factors in the average sales of the past eight quarters and the latest unsold under construction inventory as well. As things stand at the end of H1 2015, all Indian residential markets have shown a consistent increase in their QTS ratios since the end of 2012. The Mumbai market now requires 12.1 quarters to liquidate the current inventory of nearly 1,95,000 residential units compared to the 8.9 quarters required in H1 2013. One can, thus, infer that developers in the Mumbai residential market will now take almost a year more to sell their unsold apartments compared to H1 2013. It does look like developers are in quite a pickle, doesn’t it? Well, it might not be as bad for developers as we might believe. As a rule of thumb, a developer would prefer to sell his stock in line with his project completion dates so that he is free to move on to other projects as soon as he concludes his current project’s development. If he succeeds in doing so, this can be considered as a very good outcome for him. The more time it takes for him to sell his inventory after construction completion, the more financial leverage he is forced to take on. Hence, the bigger the difference between the quarters to complete (QTC) and the quarters to sell (QTC-QTS), the better off the developer is. Currently, we see that the QTS exceeds the QTC in all Indian cities giving a negative result. It follows that a greater negative means a worse situation. This delay in sales is actually reducing for all markets since H1 2013 except the NCR, which looks like it is well in the grip of a deep downturn, with developers still needing nearly three years more than their project completion dates to liquidate current inventory. While all residential markets are in the negative zone, the situation seems to be easing off since the beginning of 2014. Mumbai follows the NCR with an 18-month delay while Bengaluru, Pune and Ahmedabad developers look best poised to turn the corner with approximately six months of sales deferment. It certainly looks like the drastic drop in unit launches over the past three years has stifled unsold inventory levels and is slowly but surely putting developers in most Indian markets back on the recovery path. Encouraging trends in broader economic parameters such as reducing inflation and interest rates and GDP growth coupled with the development agenda of the current regime are bound to bring the home buyer back and boost market volumes, eventually drawing in investors and setting the stage for price growth over the next five years.