How real estate in India may perform in 2021

As the year 2020 closes in, the hopes run high with the arrival of a new year, a new beginning for which the world has already pressed the “Reboot Button”. Many sectors have witnessed the emergence of new trends with many businesses being transformed in the Covid era. The office sector has witnessed an absorption of about 29 million sq ft in top five metros, which is about 30% less than the annual absorption of 2019. However, in 2021 the office absorption in expected to rise to around 40.0 million sq ft, which is close to the 2019 figures.

In the office sector Bangalore and Hyderabad are expected to have 60% share in the overall absorption, with Mumbai and NCR remaining almost at the same level to that of 2019. The year 2021 is likely to see more spaces being taken up by “co-working” players as an alternative to work from home, in the location closer to residential hubs as many would prefer to avoid travel to office districts. The top IT companies are likely to continue with the work from home strategy or in a combination of office and WFH for most of their employees, at least till H1 of the next year.

The residential sector is among those which witnessed a robust recovery during the unlock phase during the year 2020. The pace of rebound was pleasantly surprising for developers, investors and allied stakeholders of the sector. Most of the major market did well. The sales in Q3 were up by almost 85% to that of Q2, albeit the base effect came into play. According to digital platforms, search activity for the residential sector has soared back sharply and in fact surpassed even the pre-COVID levels by 30-40 per cent in most markets. In terms of conversions, sales witnessed a maximum increase in Kolkata (68%) followed by Ahmedabad by 64%, and MMR and Bengaluru by 60% each. During the lockdown the new project launch dropped by almost 68%. The higher absorption and lack of new supply brought down the unsold inventory from 109 months to 66 months from Q1 to Q3, which is certainly a sign of robustness of the market. The demand was felt all around. Contrary to many beliefs, even the luxury segment also did well between August and November.

There are several drivers for this early turnaround. The pent-up demand being one of the major reasons. Some buyers realised that work from home is here to stay and thus prompted them to hasten their purchase. There were other benefits too. The home loan rates are now at an all-time low. The top five banks of India are offering home loans ranging between 6.9% and 8.5%. This coupled with the interest subsidy under PMAY can bring the effective interest rate below 5%, which is marginally higher than residential rental yield (3%-4%). In other words, for certain types of properties, the rental amount can pay for the interest part of the loan, which was not possible even a year before. In addition to that some state government provided discounts on stamp duty and registration. In many cases builders bore the small percentage and made a “Lumpsum” all-inclusive offer to the buyers, which was received well.

The momentum in the residential sector is likely to flow through the H1 of 2021. Many states will be extending the incentives at least till Q1 2021. A lot however will depend on the Union Budget, which is due in the first week of February 2021. A notable change is observed in the property search websites where the number of people searching for home has gone up 60% to about 80%. It is remained to be seen whether this is a temporary phenomenon or a structural shift where a pandemic has redefined the need for a home.

(By Subhankar Mitra, Managing Director, Advisory Services at Colliers International India)