Real-Estate State of The Market by Kotak Institutional Equities
Residential real estate sales saw some moderation in January 2019 (-4.6% yoy) that will likely accelerate in the succeeding two months up to March 2019 owing to the change in GST rates applicable from April 2019. Launch activity has compressed more aggressively (-60% YoY), a trend that will likely continue as marginal players face incremental pressures under a constrained liquidity environment.
Steady sales, declining launches have led to a reduction in inventory; flat realizations
All-India real estate sales across major cities clocked 34 mn sq. ft in January 2019 (-4.6% YoY) against launches of only 12.7 mn sq. ft (-60% YoY). The sales momentum remained steady in January, in line with sales seen in previous months (average of 35 mn sq. ft in CY2018), even as launches took a hit across India, more strongly in NCR and tier-2 cities. We highlight that launches in tier-2 cities dropped to 1.9 mn sq. ft against average monthly launches of 5.4 mn sq. ft in CY2018. Declining launches and improving sales momentum have continued to aid draw-down of inventory, with all-India inventory declining 11% YoY to ~1.24 bn sq. ft from 1.4 bn sq. ft in January 2019. Prices across India remained largely flat sequentially at Rs5,270 per sq. ft in January 2019, though up 4.7% YoY.
National Capital Region. Sales activity in NCR remained steady in January 2019 with sales of 4.6 mn sq. ft (+7.6% YoY) with major contribution coming from Gurugram (1.8 mn sq. ft) and Greater Noida (1.5 mn sq. ft). On an annual basis, sales averaged 4.3 mn sq. ft in CY2018. Launches in NCR took a hit in January 2019 with only 0.8 mn sq. ft of new inventory coming to market (only in Ghaziabad), a sharp decline of 85% YoY. Net unsold residential inventory in NCR stood at 223 mn sq. ft as of January 2019 and is equivalent to 51 months of sales (based on an average of trailing 12 months). Realizations declined 6% YoY in NCR in January 2019 at Rs4,930 per sq. ft likely on account of a higher proportion of affordable housing projects.
Mumbai Metropolitan Region (MMR). Launches in MMR remained weak at 2.8 mn sq. ft (-37% YoY) in January 2019 in continuance with weak trends seen in November and December 2018. Sales remained flat at 6.2 mn sq. ft (+1% YoY) in January 2019 in keeping with an average of 6.5 mn sq. ft has seen in CY2018. MMR witnessed the sharpest decline in inventory among all regions even as outstanding inventory still remains the highest at 273 mn sq. ft in January 2019 (from 304 mn sq. ft in Jan 2018), which is expected to be absorbed in 42 months, basis prevailing past 12-month sales. Bengaluru. Sales in Bengaluru in January 2019 stood at 4.9 mn sq. ft (+5% YoY) against launches of 3.8 mn sq. ft in January 2019. Launch activity at 3.98 mn sq. ft in January was low in comparison to average of 4.4 mn sq. ft per month in CY2018. Unsold inventory at 156 mn sq. ft continues to be the lowest across regions in India. Realizations in January 2019 increased 4% yoy to Rs4,950 per sq. ft.
Transitional GST provisions could lead to weak headline numbers till March 2019
We would see headline sales numbers for real estate sector in India moderate in February and March 2019, as consumers were postponing sales to see the outcome of revision in GST rates, which have been reduced with effect from April 2019. Further, the transition provision (released in March 2019) allows for developers to choose extant higher rates (with ITC) or lower rates (without ITC) for under-construction properties. Lack of clarity on applicable rates for under-construction properties as well as transition to new rates from April 2019 could hinder sales and collection numbers for companies towards the end of the current fiscal.
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