For most Indian families, real estate and gold have long been the de facto route for their savings and investments. While gold prices have moderated in the first half of FY24, realty stocks have skyrocketed. The Nifty Realty index has given returns of 36% in the past six months, outperforming the broader Nifty 50’s relatively modest 10.6%. 

According to Knight Frank, India’s realty sector is expected to grow at a 9.5% CAGR up to 2047. It is estimated to jump 12 times from the current size of $477 billion to $5.8 trillion as the Indian middle class expands and earnings grow. The report also notes that the growth in the Indian economy will largely come from the realty sector. The previous year’s trends back this up: the market grew by 68% in FY23 from its high in FY19. The drop in the affordability index, higher price realization, and a positive outlook is driving realty stocks. 

Affordability index remains healthy despite a small uptick in 2023.

The affordability index - the number of years required (in terms of annual income) to afford a house, has moderated in the past couple of years. In 2023, it averaged at 3.3 years of annual income required to afford a home. This drop over the years, has been from rising income levels and availability of affordable housing. Any further drop or moderation in this metric will help the sector with higher real estate consumption.

FY24 affordability index holds steady despite slight uptick

However, 2023 saw a surge in property prices, which pushed up the affordability index. But, with a moderation in property prices in metro areas and an expected growth in annual incomes, the affordability index is projected to remain stable. 

Sector consolidation helps listed players gain market share

Post-Covid, listed players in the realty sector have gained significant market share. With property prices climbing post-pandemic and a decline in consumption, many unorganized players have faced financial challenges. Listed players with stronger balance sheets, easier access to capital, and brand value found it easier to sell their units.  

In FY23, a major part of industry volumes were from Tier 1 cities, which grew by 36% YoY. As these listed players foray into Tier-1 cities like Ahmedabad, Kochi, and Hyderabad, further market share gains are expected. This expansion taps into new geographies and a fresh customer base. Market share of listed players is expected to grow from 24% in FY23 to 27% in FY25.

FY24 set to eclipse FY21 highs in listed developers' market share

Most developers in the listed space have aggressive launch plans for FY23-25E, especially in Tier 1 cities. In line with this, they have launched multiple projects. The industry's sales value is predicted to rise at a CAGR of 12-15% over the next two years.

Developers expand into Hyderabad, Kolkata, Kochi as prices rise

Developers are increasingly exploring territories beyond their traditional strongholds. Tier 1 cities like Hyderabad, Ahmedabad, Kolkata, and Kochi are seeing higher investments. For instance, Brigade and Prestige Estates, traditionally based in Bangalore, are now marking their presence in Hyderabad and Kochi. Similarly, Godrej Properties has expanded into Kolkata and Ahmedabad with new residential project launches.

Hyderabad and Kolkata have seen a rerating in property prices. As of Q1FY24, these cities recorded a price surge of 12.2% and 13.4% respectively. This higher demand, coupled with buyers preferring premium branded housing, have been price drivers.

Noida, Hyderabad, Kolkata, and Bengaluru dominate in property price realisation in Q1FY24

Prices in Noida Central Region (NCR) shot up by 21.3% YoY in Q1FY24. Expanding software offices in this region have pushed incomes and real estate costs up. On the contrary, prices in Mumbai have dipped by 3% YoY due to lower demand and an oversupply in the market.

Unsold inventory builds up in FY24

Sales have been slowing down in the first quarter of Q1FY24. New additions were 92,564, while only 81,845 units were sold. As a result, the overall inventory pile-up at the end of Q1FY24 reached 10,50,992 units (a 13.5% YoY growth). 

The biggest surges in unsold inventory were reported in Ahmedabad (25.9% YoY growth), Hyderabad (24.3%), and Mumbai (20.6%). The inventory build-up in Ahmedabad and Hyderabad was on account of massive expansion plans undertaken by realty firms in the past couple of years.  In terms of selling off the current inventory, Ahmedabad and Hyderabad would take 37 and 30 months, respectively. 

Chennai, Mumbai, and NCR have most months of unsold inventory

In contrast, Chennai and NCR saw fewer unit additions in Q1FY24 due to their pre-existing unsold inventory. Mumbai’s increasing inventory is on account of a regional slowdown. However, Bengaluru, Pune and Hyderabad are enjoying good traction with higher sales and lower unsold inventory. The upcoming festive season in Q3FY24 is expected to boost bookings, potentially reducing inventory levels.

Higher interest rates pressuring volume growth

The interest rates in the beginning of FY23 were attractive for home buyers. However, since April 2023, the RBI has increased the repo rate by 250 bps, with banks following suit by raising lending rates by around 300 bps. This rise in interest rates has discouraged many home-buyers, prompting them to delay purchases. For instance, a 20-year home loan of Rs 50 lakh had an EMI of Rs 38,765 (at a 7% interest rate) earlier. Now, at a 10% interest rate, it demands an EMI of Rs 48,251, an increase of 24%. Adding to this burden is escalating property prices, further pressuring potential buyers.

Rising interest rates dampen bookings in Q1FY24

In response, realty firms are applying unique strategies like interest subvention schemes for the first couple of years, waiving of registration charges, and even lower booking amounts, all in a bid to attract new home-buyers.

Realty firms navigate rising interest rates with streamlined debt management 

Operating in this capital-intensive industry means that even subtle interest rate fluctuations can have a cascading effect. As interest rates climb, the cost of capital for firms goes up and home-buyers tend to postpone their plans, ultimately reducing consumption. The recent spike in interest rates has left smaller, unorganized players with ballooning debts. Yet,  listed players have maintained their debt levels steady despite massive expansions.

Realty firms trim debt as interest rates rise in the past year

These listed players have reduced their debt in line with rising interest rates. By shifting to Tier 1 cities, they have reaped the benefits of lower capital commitments and enhanced margins. This lean approach to their balance sheet has provided much-needed liquidity, empowering them to offer incentives like free registration charges, interest subvention, and extended loan tenures. Companies such as Godrej Properties and Prestige have added significant debt in the past quarter owing to expansion plans at a pan-India level. 

The festive season may reduce the inventory build-up, but a major boost might need lower interest rates. However, Tier-1 cities are expected to drive growth in FY24. With their leaner balance sheets, companies are well-positioned to develop new projects and attract buyers.