Weak demand, regulatory changes to impact Bengaluru real estate market: ICRA

The year ahead will require real estate developers in Bengaluru to realign their operations and adapt to the regulatory frameworks coming into effect, said ICRA


Unlike Mumbai Metropolitan Region and the National Capital Region where sales volumes have declined since at least 2010, Bengaluru saw good growth in residential real estate sales till 2014, ICRA said. Photo: Mint
Unlike Mumbai Metropolitan Region and the National Capital Region where sales volumes have declined since at least 2010, Bengaluru saw good growth in residential real estate sales till 2014, ICRA said. Photo: Mint

Mumbai: Faced with slow sales and weak consumer sentiments, real estate developers in Bengaluru are slowing down on new project launches, particularly in the premium segment, and reconfiguring specifications by lowering unit sizes to improve affordability.

As per a study by rating agency ICRA, Bengaluru’s real estate market has witnessed a slowdown in demand and sales volumes. “The focus on affordable/mid-category of projects vis-à-vis the premium segment is supported by the marked divergence in pace of inventory absorption in both the segments,” it said.

“The Bengaluru residential market has remained subdued in the last two years on account of moderate demand, weak consumer sentiments and demand-supply mismatches in certain product segments,” said K Ravichandran, group head, ICRA.

However, growth in commercial office space off-take and recent regulatory developments should support improvement in long-term demand profile in the residential segment in Bengaluru though the near-term outlook is challenging, he said.

Unlike Mumbai Metropolitan Region (MMR) and the National Capital Region (NCR) where sales volumes have declined since at least 2010, Bengaluru saw good growth in residential real estate sales till 2014, backed by strong end-user demand, steady growth in commercial office space absorption, favourable demographic profile and reasonable pricing, ICRA said.

On the commercial side, the city has seen the highest level of absorption of office space across the country for the fourth year running. Vacancy levels have fallen to around 10% by end of 2016 as supply fails to catch up with demand. On the supply side, around 30 million sq ft of stock is under construction in the city and is expected to be completed over 2017-2019, the study said.

The rating agency said its outlook on the Indian residential real estate sector remains negative due to subdued demand on account of weak consumer sentiment and low affordability levels.

In addition to these factors, the demonetisation exercise in third quarter of last financial year of FY2017 has further suppressed demand for residential real estate as prospective customers preferred to wait and observe the impact of the demonetisation on real estate prices, it added.

Further, the launch pipeline is expected to suffer as small and marginal developers may not be able to conform to the strict rules under Real Estate (Regulation and Development) Act. Even the larger players may take a cautious approach during the transition phase, it added.

“The year ahead will require real estate developers to realign their operations and adapt to the regulatory frameworks coming into effect. While the transition period is expected to pose near term challenges, the developers that are able to weather these challenges will enjoy the benefits of a more transparent and organised industry with reduced competition and stable demand prospects over the longer term,” said Shubham Jain, vice president and sector head, ICRA.

More From Livemint