India’s real estate sector witnessed unprecedented growth in 2010 – 2020, growing at a CAGR of 10% in 2010-2015, and 15% in the period 2015-2020.
But the outbreak of the COVID19 pandemic brought this growth to a sudden halt. A credit crunch for developers and MSMEs in the sector coupled with a collapse in demand saw the real estate sector crash by over 40% in 2020-2021, resulting in losses to the tune of Rs 1 lakh crore. (KPMG RE report 2021) With the worst of the pandemic now behind us, are we set to witness a revitalized real estate sector in 2022?
Early signs indicate the answer is a resounding yes. Experts are bullish on the prospects of the industry in 2022, judging by recent trends. The residential sector grew by 51% in the last two quarters of 2021, with over 232,000 new housing units sold among tier I cities across India, according to a report by Knight Frank consulting. Markets in Mumbai and Pune made the biggest gains, garnering over 56% of new sales volume in Q1 2022.
Affordable flexible payment plans have ensured homebuyers prefer under-construction homes over the Ready-to-Move-in (RTMI) segment, with under-construction homes making up over 80% of sales during the year.
The real estate index has also risen by 75% in the last one year, largely beating other high-performing indices, including the Nifty50.
This impressive rebound, which comes despite an inflation in construction costs, is being viewed by some analysts as the beginning of a cyclic upturn, and not just a temporary market correction.
In 2022-2023, industry projections estimate strong capital value growth to continue for the residential segment, particularly in luxury housing and commercial real estate.
But what is causing this unprecedented growth, and what impact is this having on steel demand?
4 key factors are behind this spurt in real estate growth –
Pent up demand – Owing to the pandemic and the move to remote ways of work, several migrant, white-collar professionals in cities took the opportunity to return to their hometown for the short term. As a result, many potential homebuyers abandoned their plans for purchasing a house, preferring instead to wait for the end of the pandemic before making any major investments in real estate. With the world returning to normalcy, this pent up demand is likely to drive a major share of renewed homebuying in 2022.
Affordability – With an oversupply of unsold inventory, particularly in cities like Mumbai and Bengaluru, real estate developers are offering attractive offers, discounted prices, and flexible repayment plans for serious buyers. While interest rates on home loans have only seen a slight reduction, banks and government financial institutions are keen on tapping into the renewed demand, offering flexible payment plans and tax sops for first time homebuyers.
3. Rise in office space absorption – As companies resume operations at technology parks and commercial complexes in metros, developers are witnessing a boom in office space absorption. Reports indicate a growth of up to 30% in net office space absorption, with the total footage under commercial occupation likely to touch 45 million square feet by the end of the year. In addition, 150+ new SEZs are expected to become operational in the next 3-5 years.
4. Macroeconomic push – In an effort to catalyse growth, the 2022-23 Union Budget saw a revived focus on the housing sector. Affordable housing schemes like Pradhan Mantri Awas Yojana, which has now been extended to 2024, and various subsidy schemes for first-time buyers of affordable housing are set to rejuvenate the real estate market in tier 2 and 3 cities. In October 2021, the RBI decided to keep the benchmark interest rate unchanged at 4%, giving a boost to the real estate market and investor sentiment.
Demand for steel and steel products - Impact of the 2022 Real Estate market boom on MSME sector
This surge in the real estate market is not without its ripple effects up and down the supply chain. In particular, medium to small manufacturing firms that make up the bulk of the supplier ecosystem that the real estate and construction industry in India depends on, are expected to struggle with under-capacity for most of 2022. Further, newer steel products, such as readymade steel structures that reduce high-rise construction time and effort, are expected to see more general adoption.
With 62% of India’s steel demand coming from the real estate sector, MSME suppliers of steel equipment, steel tubing, and steel furnishings used in the building construction industry are expected to witness a significant increase in orders and order value from real estate developers. To cope, proper demand forecasting and inventorying in advance is critical to avoid any disruptions to business and cashflows due to under capacity. Manufacturing firms making the move to digital commerce and online platforms, particularly to meet steel procurement demands, will benefit from faster delivery of steel raw material, fewer supply shortages, and a greater variety of steel products available online, resulting in a significant reduction of costs.
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