Easing of house rentals
2022 witnessed the biggest jump in home rentals for any year in the last decade. Certain micro-markets in Bangalore (Whitefield, HSR layout) saw rentals jumping by 40%-50% along with a severe shortage of homes. There was a sudden increase in demand as companies resumed working from office This was met with a shortage of supply as several projects were delayed due to COVID. Under-construction projects were forced to push possession dates as work had come to a standstill during COVID and very few new projects were launched in 2020.
However, a lot of this new supply is expected to be ready by 2023 and this should see house rentals also easing as the market moves into its steady state.
Continued housing demand
The residential real estate market in India has broadly remained flat from 2014 up until 2021. Multiple issues such as demonetization, implementation of RERA and COVID have held the market back for close to seven years. It’s only from Q2 of 2021 that housing demand and house prices have seen an uptrend. In spite of the recent increases in the repo rate by the RBI, interest rates are fairly reasonable (compared to 5-10 years ago). As long as interest rates for home loans remain in the psychologically comfortable single digits, we should expect housing demand to remain high in 2023.
Increased commercial real estate absorption along with increased rental yields
Demand for Grade A office spaces in metropolitan areas has picked up over the last year and it’s expected to remain so in 2023. While the design for office spaces is seeing a change post the pandemic, with more zones for collaborative working, the fundamental requirement for an office space remains.
Office space absorption touched historic highs in 2022 and the trend is expected to continue.
However, rental yields for commercial real estate are a lot more sensitive to interest rates than it is for residential real estate. With higher interest rates in 2023, we could see higher rental yields and accordingly lower prices for Commercial properties. The prices of REITs are a great indicator of this and we see that they are already down between 4 and 10% over the last couple of months.
Larger townships and gated communities to have more demand
The demand for integrated townships and large gated communities have seen an increase over the last couple of years. These townships provide a variety of sports and leisure facilities, better security, community living and the convenience of having everything in an enclosed setting. Usually located in suburban areas, these townships have green surroundings and are free from traffic and congestion.
As offices are also designing for flexible work environments removing the need for people to commute to office every day, more people are choosing to move to these townships and live further away from their offices. Prices for homes in larger communities have appreciated a lot more over the last two years than they have in standalone buildings. This trend is expected to continue with real estate developers also launching many more such projects.
Most young professionals consider real estate investments to be “unattractive”. Meagre price returns over the last 5-7 years along with easy access to investing in equity have led to this feeling. Thus, many professionals choose to rent instead of buy, despite having sufficient liquidity. However, real estate cycles have historically lasted very long. 2022 was a breakthrough year for residential real estate in India, reversing a long trend of a flat market. This is expected to continue over the next few years along with growth in our economy as well as increased migration into cities. The coming few years could finally see many young professionals making their first home purchases.
The writer is Co-Founder & CEO Ivy Homes.