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Imagine this – India, a country which is home to 1.25 Billion people, growing at over 7.5% per annum (fastest among all major economies), receiving record amount of FDI, having a very stable & proactive central government, and having a housing shortage of 18.78 million units, does not have a robust housing demand. In fact a recent report indicated that housing absorption has declined by up to 30% in almost all metros including Bangalore (arguably the best performing market) in this year alone.

On the contrary leasing of commercial office space in metros is going on extremely well. A CBRE report says that India’s top seven cities saw a record 38 million sq ft of office space being taken on lease in 2015, an increase of 18% over that in 2014. It is expected to have stronger leasing of office space in 2016 as well. As we know that higher commercial leasing means companies are expanding & hence hiring more people. A recent survey suggested that India is expected to see the highest rise in hiring process this year among Asia/Australia region. However higher commercial leasing activities have not translated in to better residential sales in India. Why?

Though I am baffled by the this unusually long slowdown in real estate, I am trying to address it by listing out probable causes:

Increase in Un-affordability: In the recent years property prices have increased at a much faster rate than that of average household income. Consequently a large number of people living in the metros & other cities are priced out. Even the “once” affordable city Bangalore has become quite expensive with average prices in secondary business districts such as Koramangala & JP Nagar increasing from Rs. 3500/- to Rs. 10,000/- per sq ft. and those in suburbs increasing from Rs. 2500/- per sq ft to Rs. 5000/- per sq ft in less than a decade.

To understand how unaffordable Indian cities are, please take a look at the below table of Affordability Index as listed out by The Demographia International Housing Affordability Survey. Real Estate Affordability Index is measured as ratio of Total Cost of Property / Total Annual Income. Ideally the ratio is around 3. Hence if your annual income is Rs. 20 Lakhs, the total cost of property should be ~Rs. 60 Lakhs.

India has just 10 Lakh income tax assesses with an annual income of more than Rs. 10 Lakh while most of grade A properties in metros are priced upwards of Rs. 1 Crores, pushing the affordability index to more than 5. Hence we can clearly see almost all major cities are severely unaffordable for majority of Indians.

Rising industry risk: Customers have become risk averse as they have lost faith in builders as well as government agencies. Buyers are not sure whether builders will finish projects on time or will finish them at all. Huge delays have become a common occurrence in cities such as NCR & Mumbai and most of top builders are trapped in endless litigations with their customers. Apart from builders even regulators and courts to some extent have created unnecessary problems in the industry. The recent NGT order and Demolition drive in Bangalore are perfect examples. An increase in risk perception of the industry has forced both genuine buyers and investors to stay away from the industry.

Lag b/w Leasing and Residential Sales: Usually there is a lag of 18 to 24 months in terms of leasing activities and pick up in residential sales as a large portion of leasing is in the form of “future commitments”. This usually takes anywhere between 6 months and 24 months for the builder to deliver and the company to occupy the premises. So there are chances that residential sales might pick up in the later quarter of FY 17-18.

Rent vs Purchase: The typical quandary affecting a majority of people is as valid today as it was yesterday. In fact it is only getting stronger with each passing day as properties are becoming more & more unaffordable. Why buy a property by taking a loan when one can enjoy the same property on rent by paying a fraction of monthly EMI? In a risky environment it makes sense to defer property purchase decision & continue to live on rent. Also more & more people are discovering, which I discussed in my previous post, that an investment in a house for self-use creates a huge liability!

Horrible Infrastructure: In India distance is measured in “time” and not in “Kms”. Indian cities have one of the world’s slowest moving traffic with an average speed of 15 Km/hr which means it takes 4 mins to commute 1 Km of distance. This forces people to stay closer to their place of work, which has higher property prices, rather than in outskirts. As discussed in the above paragraph people prefer staying on rent in a better location than buying a property for self-use in outskirts. Hopefully once metro rails become operational in metros in the next decade residential demand shall pick up in the outskirts due to increased connectivity.

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