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Structural Shift in Residential Real Estate in India
The markets and stakeholders who would take cognizance of the factual positions and evolve strategies to make the most of the demographic dividend emerge as the winner.
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From Q4 2020, residential real estate has witnessed a resurgence. There are divergent views on whether the momentum is here to stay or is just a temporary phenomenon. The doubt casts deeper when the sales dwindle in cities where the Covid surge is high. Therefore, the real question is, what is the long-term prospect of Residential real estate in India?
If we look at residential sales performance across the top seven cities in India, the annual figures have consistently dipped from 355,000 units in 2011 to 255,000 units in 2019. In 2020, the figure was 160,000 units while nearly two quarters wiped off. In contrast, the population in India grew from 1.21 billion to 1.35 billion in this time frame. Many theories were floating around over the sluggish market; some blamed it on the demonetization, some said millennials are renting and not buying a home. But if we take a closure look at the data, the facts changed drastically.
NCR and MMR, which contributes nearly 50% of the house sales among the seven metros, forced the numbers' nosedive. NCR fell from 100,000 sales in 2011 to 28,000 by 2020. MMR also slipped to a great deal. On the contrary, the southern cities like Hyderabad and Bangalore sales grew at almost 8-9% of the compounding rate during this period, while Kolkata remained stable. It shows that demographic fundamentals were not at fault. For NCR, it was the over-leveraged, insolvent developers who could not deliver projects. Disputes, litigation, deceit, and lack of approvals created a sense of despair in the entire north India market. On the other hand, the MMR region went too far on the extremes of affordability, fuelled by swelling ready reckoner rates, hefty premiums for FSI, and perpetual high land cost. Thus, we need to wait and watch whether the market will roll back to the previous era or has something positive to look at in the new decade at 2021.
Three fundamental changes are going to prevail in the current decade. First is the change in demographic structure. In India, nearly 60% of all home purchases occur in 35 to 55 years. That is where stability in income and growth takes place. This age group is also known as the prime consuming class. According to the July '20 population report of Census of India, about 268 million were in the exceptional consuming age group in 2011, which swelled to 337 million in 2021 and will grow to 400 million-plus by 2031. Even within this cohort, the 35-45 years of age group will dominate with a 55% share. In the previous decade, the 25-35 years used to be the dominant cohort. Therefore, it is the sheer size and the presence of more stable income groups that indicate that housing will be in demand for a long time.
The second important aspect is the rise in per capita income. With positive thinking that the world will return to Pre -Covid level by 2023, India is expected to grow between 6-8% per annum, taking the GDP to nearly USD 8Trillion by 2030. With this GDP number, the per capita income will also grow 2.5 times from the current USD 2000 per person. It means people will have more money in their hands.
The third shift is in the social structure. According to the Technical group's report on 'Population Projection' in July 2020, the dependency ratio will decline from 6.5 in 2011 to 5.3 by 2031. Within the dependent group number of children is also going to be lesser. This indicates that more and more families will be smaller, having less dependent people meaning more significant savings and disposable income.
The decade of 2021 to 2031 started ominously, but it is certainly not the way to look at the new decade. The three structural shifts indicate that the prime consuming class in India will swell in number; they will be economically better off and have more disposable income. There is good news for many sectors, including real estate. Another notable fact is that UP, Bihar, MP, and Rajasthan will account for nearly 50%population growth for the next 15 years, indicating that the metro cities in India will continue to see migration from these states. While the fundamentals speak unequivocally about a buoyant residential market in India for the next decade, a lot will depend on how the developer community curates their product and price to match the ever-changing patterns of need. The markets and stakeholders who would take cognizance of the factual positions and evolve strategies to make the most of the demographic dividend emerge as the winner.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.