Interest rate hike haunts home demand; industry remains positive on momentum

The recent rise in demand for the housing space has taken a hit as the industry has been showing some signs of fatigue lately. The updates from the companies in the December 2022 quarters have failed to boost enthusiasm at large. However, industry players remain positive on the space, despite the near-term headwinds.

Analysts tracking the real estate space believe that the real estate companies' the margins may remain under pressure considering rising interest rates, which may lead to softened demand for the sector. The company's operational performance is likely to be dented.

On the contrary, they believe that the muted demand is a near-term jitter, which may not persist for more than two quarters as strong project pipeline, new launches and softening of input costs will aid their performance. The developers may go for a price hike in select segments, say the high-end or luxury category, to combat brewing concerns.

Quarterly updates from some of the leading real estate companies for the October-December period have taken a major blow, whereas others have seen some impact on their revenue, operation performance and margins.

According to its quarterly sales update, Oberoi Realty recorded a 67 per cent fall in booking value to Rs 639 crore in the December quarter from Rs 1,965 crore in the year-ago quarter. The booking value has fallen compared to the previous quarter too, down 45 percent from Rs 1,156 crore in the September quarter.

Macrotech Developers, which sells real estate properties under 'Lodha' brand, reported a 12 per cent decline in their income at Rs 1,902.44 crore. Its operational profits declined 15.6 per cent and margins slipped to 22.77 per cent. However, its net profit rose 41 per cent to Rs 404.98 crore on a year-on-year (YoY) basis.

Market experts believe that buoyancy on the real estate space will continue in the new year and the pace of sales is unlikely to take any major hit as majority of the parameters remain on the favorable side. Even the inflationary fears will ease down by the second half of the ongoing calendar.

The residential sector was an exceptional story of growth in 2022, as despite numerous inflictions, the pace of growth remained largely intact. This momentum is the result of a definitive shift in attitude in favor of home ownership that has ignited the latent demand, said Shishir Baijal, Chairman and Managing Director at Knight Frank India.

"The shift is so strong that despite some worsening in affordability on account of rising home loan interest rates, sales momentum has remained buoyant. Demand for homes has been further strengthened by continued economic growth, financial and income stability and moderately growing prices," he said.

Other industry trackers said that the sentiment of home ownership is robust in the country and consumers are confident of investing in this space. Their plans are not taking a back seat, despite the inflationary concerns, thanks to the changed attitude in the post-pandemic period.

The ongoing inflationary trends and recalibration of home loan rates have miniscule impact on the real estate demand graph. Residential projects across India have witnessed a surge in bookings as homebuyers are not holding back on their plans of buying a home, said Piyush Bothra, Co-founder and CFO at Square Yards.

"Even with a modest increase in housing prices and back-to-back interest rate revisions, affordability still continues to be attractive for most homebuyers," he said. This coupled with rising income, strong GDP outlook, robust macroeconomics, need for financial and emotional security and penchant for bigger homes, have sustained the demand for residential properties.

According to the latest readings, mid segment and affordable housing has been impacted to most due to rising interest rates and potential of rate hikes in these segments is also limited. On the other hand, the luxury home segment has seen growth.

Sales volume in the affordable category also improved (check as the second line talks about decline in share) in comparison to the past period, said Baijal, Chairman and Managing Director at Knight Frank India. The share of sales for units below Rs 50 lakh witnessed a decline from 42 per cent in H2 2021 to 35 per cent in H2 2022.

"The share of sales in the Rs 50 lakh to Rs 1 crore mn segment grew from 35 per cent in H2CY2021 to 37 per cent in H2 CY2022, while units above Rs 1 crore also witnessed a growth from 23 per cent in H2 CY2021 to 28 per cent in H2 CY2022," he said.

The lower middle-class income group with constricted household savings would be discouraged from home-buying at the juncture as rising prices and interest rate hikes will act as a psychological barrier on them, said other analysts.

The middle and upper-middle class segment who also fall in the affordable housing category,  are unlikely to stall their home-buying decision owing to their pent-up need for bigger homes and prevailing interest rates still within affordable range, said Bothra from Square Yards.
 

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