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Realty Check: Luxury residential real estate market continues to thrive in India
The Indian Express  |  March 20, 2017

Ashwinder Raj Singh

The residential real estate sector in India has had its ups and downs for two years now. Negative news about the sector seem to be all the rage these days. Luxury real estate, in particular, has been getting very bad press of late. Let’s take a quick look at what is happening on the ground and what’s driving it:

 

India’s GDP growth for FY17 has been pegged at 7.1 per cent. The number of Indian ultra-HNIs jumped to 2.36 lakh currently from 1.84 lakh in 2014 and is expected to reach 4.83 lakh by 2025.

 

GDP per capita income in India is $2,000 and is expected to increase to $3,500 by 2020. Higher incomes naturally translate into a higher appetite for luxury housing.

 

The country’s realty market will almost double to $180 billion by 2020 from the $93 billion it accounted for in 2014, thereby accounting for 13 per cent of the GDP compared to the current 5-6 per cent. Luxury housing constitutes almost 4-5 per cent of the total real estate market and with overall pie increasing, share of luxury housing is bound to increase.

 

India is a constantly growing country, and its housing deficit is the stuff of legends. Currently, at around 17.5 million units, most of the deficit is in affordable housing. This is the segment where demand is the highest.

 

Mid-income housing

 

Mid-income housing — or housing that caters to the better-off middle class — also sees a lot of demand, but such housing needs to be in good locations with sufficient infrastructure, priced right and within reasonable completion timelines to attract the latent demand. The oversupply that exists in this segment is largely because many projects have fallen short of a few or all of these fronts. Given the huge pent-up demand for mid-income housing, this supply will eventually be absorbed — excess supply is usually measured in the number of months it will take for it to be sold. In most Indian cities, there is excess supply in this segment because most of the demand is from end-users, not investors. There is a lesson here that investors are no longer a major force on the residential market.

 

The previous boom years had seen a lot of real estate speculation happening. Investors were literally bulk-buying into cheap under-construction housing projects in hot emerging development corridors. Their intention was to buy cheap and sell at considerable profit when the projects were complete, the locations picked up and demand for homes there rose. Developers had gotten quite used to this phenomenon, and launched housing projects at breakneck speed.

 

Luxury housing

 

At the height of India’s initially exuberant Infotech boom, luxury housing was also in great demand. Young software professionals, seduced by unnaturally fat salary packages, took massive home loans from banks and bought into fancy homes with all the trimmings and accoutrements of a wealthy, enabled lifestyle. Their managers and chief executives went in for even fancier abodes, again heavily leveraged through loans. Stock market speculators, also riding high on the waves of massive profits, were not far behind.

 

NRIs drawing astronomical salaries or running successful businesses abroad were constantly raking money into luxury homes back in India. Not surprisingly, investors were snapping up luxury condos as fast as developers could churn them out. Then came the Dotcom bust, and the global economic meltdown after Lehman Brothers collapsed — and things were never quite the same again. India’s economy took a series of crippling hits. Software techies saw their salaries shrink, stock market profits evaporated, jobs became scarce and a large chunk of hitherto prosperous NRIs were struggling to stay afloat in their countries of residence.

 

In India, developers of luxury housing took a very long time to wake up and smell the coffee. Luxury housing involved fat profit margins which they didn’t really want to say good bye to. However, the writing was on the wall — mass investor bookings in luxury projects were now a thing of the past.

 

Moreover, Prime Minister Narendra Modi demonetised the most circulated high-value currencies in November 2016. Luxury housing had almost always involved a lot of cash in the transactions, making it an ideal place to park unaccounted cash.

 

Almost 45,000 luxury residential units were launched in FY16 in the top 9 cities, constituting almost 21 per cent of total residential launches. Bengaluru leads with 30 per cent of luxury home launches, followed by Mumbai (17 per cent) Bengaluru also leads with almost 29 per cent of total luxury home sales in FY16, followed by Mumbai (16 per cent) and Pune (15 per cent). Experts, who predicted that luxury housing in India was finished, ignored that luxury housing caters to a specific segment of demand which, like the demand for budget- and mid-income housing, has not gone away. The country’s wealthier homebuyers still want high-class homes with all the bells and whistles of sophistication in great locations.

 

Unlike affordable and mid-income housing, the market for luxury homes is not driven so much by home loans as by personal wealth. Where home loans are involved in such housing, they are backed by sizeable down payments and fully-assured repayment power. Nobody who is not confident of his or her ability to see such a transaction to successful completion will even considering such a purchase today. Also, investors active in this segment operate within a fail-proof inner circle of well-heeled clients for whom the question is not ‘if’, but ‘what’, ‘how much’ and ‘when’. The market for luxury homes continues to thrive within the specific segment of discerning, affluent buyers who continue to looking for nothing but the best.