When you bear in mind that growth in the Indian economy is forecast at 7% to 7.5% during 2015, why is the real estate market languishing? We all know that India is one of the largest and most influential economies around the world but why is there such little confidence in the property sector? There are a number of factors to take into consideration which we will cover below.
Massive stock overhang
It has been reported that there are in excess of 700,000 unsold property units across 8 of India’s largest local real estate markets. These are markets which have performed extremely well in recent times although appear to hit a turning point in 2014 which has continued into 2015. When you bear in mind this massive overhang of property units for sale it is no surprise to learn that many investors are sitting on the sidelines waiting for a “race to the bottom”.
It is estimated that this excess of property would take over three years to sell at current rates. While there are other factors to take into consideration this is certainly a considerable issue in the medium term.
Sales in the National Capital Region (NCR) which takes in the likes of Delhi, Gurgaon and Faridabad to name but a few, have fallen by 50% compared to this time last year. This kind of movement in the markets tends to alarm investors with many now of the opinion that there is no rush to acquire Indian property. It is also worth noting that while there are in excess of 700,000 unsold properties across the major cities, there are 190,000 in the NCR alone.
This lack of sales has obviously impacted developers who have cut back on the number of new developments by around 40% during the first half of 2015 compared to the previous year. Again, with a growing backlog of properties awaiting investors it is difficult to see anything but a further reduction in new unit numbers.
Over the last decade we have seen a significant increase in many areas of the Indian real estate market. Many believe it was the concept of “double income no kids” families which made full use of a strong Indian economy to acquire real estate. We seem to have left this stage of development in India and there are now fewer people with either low levels of debt or high disposable income. In simple terms, the new generation of domestic Indian real estate investors simply do not earn enough to acquire property in the most sought after regions.
At some point, if the economy keeps growing at a relatively high rate, we will see the affordability factor turning in favour of first-time investors. This could be the point at which the Indian real estate market makes a prolonged recovery but how far we are from this particular scenario remains to be seen.
While significant economic growth is expected in India in the short to medium term there is no doubt that the Indian real estate market is suffering from oversupply. There are in excess of 700,000 properties unsold across the eight major real estate markets of the country. This is forcing many investors to think again, sit on the sidelines and ultimately wait for prices to fall further. Against this backdrop it is difficult to see any short-term rebound in real estate prices although a reduction in interest rates could bring some much-needed cheer to investors.