Priyanka Parashar/Mint
Priyanka Parashar/Mint

Real estate sector giving mixed signals

Reports suggest that sentiment is improving but prices have moderated. Investors should be diligent

Since the fourth quarter of FY14 a lot has changed for the real estate sector. The new government is focusing on infrastructure development and affordable housing. While the Union budget (July 2014) brought clarity on taxation of real estate investment trusts and infrastructure investment trusts, paving the way for liquidity.

It is no wonder that the Ficci-Knight Frank Real Estate Sentiment Index for July-September 2014 has shown an increase from the level of 51 to 63 in the current sentiment of stakeholders, whereas future sentiment stood at 71 compared with 69 in the last quarter. The index value at 50 shows neutral sentiment and shows increasing optimism above the level. The index is based on a quarterly survey of supply-side stakeholders across India including developers, private equity funds, banks and non-banking financial companies.

The report, based on the index’s findings, also noted that though the central bank has not cut policy rates in the current fiscal, a 50 basis point reduction in statutory liquidity ratio has eased the liquidity situation of banks. The higher availability of funds is expected to be beneficial for the home loan sector. Added to this, reduction of home loan rates by leading banks is an added bonus for homebuyers and corporates.

However, things were not this upbeat till a few months ago. The realty sector was not looking up till the end of March 2014.

As per the Reserve Bank of India’s (RBI) October bulletin, “Recent trends in the house price index (HPI) show that increase in the house price, which was steep in the last few years, moderated in 2013-14."

The HPI data shows that house prices rose 11.4% year-on-year in the fourth quarter of FY14 compared with 19.9% and 25.8% rise in corresponding quarters of 2012-13 and 2011-12, respectively. Home prices of small- and medium-sized categories has moderated more sharply compared with the large size category.

Homebuyers should be cautious though. According to Anuj Puri, chairman and country head, Jones Long LaSalle India, “Though the demand for affordable and mid-segment houses remains intact, market conditions might have eroded the pricing power of developers, especially those who do not have strong holding capacity."

A Nomura research report citing the RBI data says that the sector should underperform as an asset class in the current environment of high real interest rates and lower inflation. Ficci-Knight Frank’s note also suggests that stakeholders are in a wait-and-watch mode to see if sentiments remain positive in the coming quarters.

Now, if you plan to buy property, it is good to be ready. However, it will be prudent to be diligent before you take the final call as the space is still giving mixed signals.