Factors to Consider Before Purchasing Property
When contemplating the purchase of property, several key factors warrant discussion. These include the economic growth outlook, interest rates, job security, demand, and credit supply. Understanding these dynamics is crucial for navigating the real estate sector effectively.
Market Segment Distribution
Estimates indicate that out of the total real estate market, the residential segment represents approximately 75 percent. Commercial office spaces constitute around 20 percent, with the remaining 5 percent comprising retail and hospitality.
Residential Segment Analysis
The mid-market residential segment, encompassing properties priced between Rs 15 – 50 lakh, accounts for roughly 85 percent of total mortgage disbursements in India. Consequently, this segment represents about 64 percent of the market. Notably, 55 percent of mortgage finance disbursement for residential properties occurs within the top seven cities, with the remaining 45 percent distributed across the rest of the country.
Historical Context and Market Shifts
Previously, there was a shortage of two to three bedroom properties within the Rs 15 – 50 lakh range in major cities' metropolitan areas. The influx of equity capital led to an artificial demand for land, facilitating the development of large township projects and SEZs. Developers overestimated their capacity, announcing multiple projects without adequate planning and execution strategies.
The Impact of the Financial Crisis
Between 2006 and 2008, residential project prices surged by 400 – 500 percent in most cities. Simultaneously, interest rates rose from historic lows to peak at 13.75 percent by 2008. This posed significant affordability challenges. The stock market crash and subsequent job insecurity following the Lehman Brothers crisis drove away investors and buyers. Domestic banks tightened credit, causing the market to stall.
Developers' Response and Market Recovery
Developers faced financial stress with reduced cash flows from project sales and declining rentals in commercial and retail spaces. In the absence of retail buyers, developers struggled to secure capital for project completion. This led to widespread project delays and temporary abandonments. However, realizing the potential of affordable housing, several developers began repricing projects and repositioning them as affordable housing options.
Current Market Outlook
The mid-market residential real estate segment appears to be recovering, although the same cannot be said for commercial office spaces and retail malls. This segment drives significant cash flows and demand, with a higher proportion of bookings from actual users rather than investors. Developers are now focusing on affordability, leading to a resurgence in buyer interest and cash flow improvement. Recent affordably priced project launches have seen positive responses, with more launches expected in the next three months to a year. Prices are likely to stabilize for a while, presenting ample opportunities for buyers.