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Real estate’s recent recovery could be a case of over-optimism for investors, and concerns have surfaced that the revival could peter off. After clocking gains over the last month, the Nifty Realty Index started to slip, losing about 2.2% on Wednesday.

To be sure, a mix of factors did support a decent recovery in sales of residential properties in the September quarter. Weak prices, pent-up demand, low home loan rates and developer discounts saw fence-sitters thronging the market.

A report by Crisil Ltd noted new home sales registrations improved in October in some key cities, with Mumbai leading the pack. Sales in Mumbai and the rest of Maharashtra was 1.1-1.3 times higher compared with January. Channel checks also showed some demand continuing in October.

Inventory overhang
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Inventory overhang

“Residential real estate transactions began rising starting Dussehra and the momentum has continued up until Diwali. But here, we are talking about an improvement in demand after six months of a dry spell because of the pandemic," said Gulam Zia, executive director, Knight Frank India.

Real estate sales also got a lift from lower stamp duty rates. The Maharashtra government recently reduced stamp duty on flats from 5% to 2% till 31 December and to 3% between 1 January and 31 March.

These measures are considered helpful for developers to offload the pile of inventory at a faster pace. That can boost their cash flows and provide some cushion to their highly leveraged balance sheets.

However, given the temporary nature of current demand drivers, analysts caution the rebound may be short-lived. Besides, a large chunk of property still remains unsold in key markets.

According to Knight Frank India, in the first half of 2020, the unsold inventory of housing units in Mumbai was 150,054. This is 10% more than a year earlier.

For Pune, the unsold inventory units stood at 42,855, a 35% increase over the same span of the previous year.

“Looking at unsold inventory data, it is too early to say if the sector is out of the woods and that this demand is sustainable," said Knight Frank India’s Zia.

“While we agree that residential sales have increased sharply from October 20, many experts have said that this is a case of pent-up demand and that growth will peter out from February-March 2021," said analysts at Nirmal Bang Securities in a note to clients.

“The BSE Realty Index has appreciated by 52.8% from its low struck in mid-March post the impact of the covid-19 pandemic. In our view, the BSE Realty Index’s rise is a case of misplaced optimism," the analysts added.

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