On a recent trip to India after more than two years away I was struck by how one subject in particular led many conversations: land. The Indian residential property market has been in a protracted downturn since 2013, on the back of weak pricing, limited volumes and high inventory levels. But the sector has recently hit a turning point. Land prices and sales that have been in the doldrums for almost a decade have started to gain traction as demand to build new houses and apartments picks up.
The last few years in India have seen rising income levels, which combined with the prolonged period of weak pricing for long-duration debt, has led to an improvement in the overall affordability of the sector (See Figures 1, 2 & 3). In 2012, the Reserve Bank of India (RBI) began a cycle of interest rate cuts which have contributed to record-low mortgage rates for borrowers. Moreover, there has been an increase in the availability of ‘low-ticket size’ mortgage products – offering attractive and affordable payment structures – that have widened the availability of home loans to greater proportion of the population.
Other factors that have contributed to the upturn in the property cycle include: industry consolidation, boosting the market share of a clutch of leading developers; a historical decline in new home starts (the number of home construction projects on which ground is broken), leading to a fall in available inventory; an increase in regulatory oversight of the sector; and a surge in demand for larger properties as more people work from home in the aftermath of the pandemic.
Figures 1, 2 & 3
Rising sales
Residential sales in India’s seven largest cities – Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad and Ahmedabad – hit their highest levels last year since 2014 (See Figure 4), according to Jefferies, and initial data for Q1 2022 suggests that robust demand has continued (despite a short and sharp third wave of Covid-19 in January).
Figure 4: Sales have picked up
Source: Jefferies
2021 was the third consecutive year when the number of real estate development launches lagged the rise in demand (see Figure 5) and as a result overall inventory levels have been trending downwards (see Figure 6), pushing up home prices as demand picks up. Inventory is now down to a nine-year low, resulting in enough pricing reaction to beat construction cost inflation.
Figure 5: Launches lag demand
Source: Jefferies
Figure 6: Inventory is trending down
Source: Jefferies
Another trend that has contributed to the shift in the housing market has been consolidation among Indian developers: half the number of property groups launched projects in 2020, compared with 2014.
Driving this sector consolidation has been the implementation of tougher regulatory standards. The Real Estate (Regulation and Development) Act introduced in 2016 established regulatory bodies across India’s 28 states and eight union territories to oversee the sector and adjudicate on disputes. The Act has helped reduce malpractice in the sector, boosting the market share of large established operators – improving their access to funding and overall execution capability – at the expense of smaller operators.
Figure 7: Top developers have consolidated market share
Source: Jefferies
In 2020, about 60% of the total real estate project launches were by the top 30 property groups in each region and the rest were by a long tail of about 1,000 less well-known developers. India’s listed property developers enjoyed record high sales highs during the first four months of 2022 (see Figure 7) and many groups are optimistic about double-digit growth next year.
Favourable demographics
India’s population (currently 1.4 billion) is expected to surpass China in the next few years, making it the most populous country in the world by 2030. At present, the country has approximately 300 million households and this figure is set to increase sharply on the back of rapid urbanisation. About 35% of the country’s population was defined as urban in 2020 by the World Bank, leaving a lot of space to grow.
Meanwhile, rising education levels and the growth of the middle class – which is expected to double in size over the next decade – are driving strong demand to upsize and upgrade properties (most people live in one- and two-room dwellings) creating a structural tailwind for the Indian housing market.
Mortgage penetration in India remains low at 11% of GDP, compared to other leading emerging markets and the developed world, providing enormous potential uptake in the next few years (see Figure 8).
Figure 8: Mortgage penetration in India remains low
Source: Jefferies
As the housing cycle in India picks up it will spur sales and investment in a raft of related sectors such as cement, steel and consumer durables; as well as general economic activity. The GEMs strategy has holdings in ICICI Bank, State Bank of India and Bajaj Finserv which stand to benefit from the surge in mortgage lending and the growth of related sectors. The SMID strategy has holding in developer Oberoi Realty, a premium Mumbai real estate developer.
Inflation in India, like other economies, is running high and the RBI has started normalising policy. Rate increases from here will have some impact on mortgage rates and affordability, however not enough to turn the cycle given the other factors at play
Real estate cycles in India are typically seven- to eight-years long. All the available indicators suggest we are at an early stage in the cycle and the underlying data suggests the cycle will sustain.
