Massive demand, supply and rising prices await nation’s most profitable real estate market: Report

Mumbai’s property market, which accounts for 10% of national volumes, 23% of sales and a third of margins, is on the cusp of a historic bull cycle on all fronts, having already hit a ten-year high in new or primaries in 2021 selling 38,000 units despite pandemic-induced disruption, report says.

It has also enabled the city’s civic body, BMC, to earn about Rs 14,200 crore in 2021 as building permit fees, up 5 times from the previous year, as Developers have raced to gain traction in the country’s most profitable market, UBS Securities India said in a weekend report.

The upsurge in demand and supply, as well as the demand for authorization, has also been driven by recent regulatory initiatives; such as a 50% reduction in approval fees, led to 150 million square feet (msf) of new development rights approved in 2021 over 2020, and new residential supply of 33 msf, implying an increase in supply in Mumbai in the medium term which will have the pricing and margin implications for developers as well, the report says.

According to UBS, Mumbai is the most profitable real estate market in the country, with the megacity contributing up to 33% of margins – Rs 22,500 crore out of Rs 69,100 crore; 23% or Rs 75,000 crore of Rs 3.24,200 crore of annual turnover; and approximately 10% or 38 million square feet of 393 million square feet of supply in 2021.

The year also saw primary sales reach a ten-year high in the megacity with 38,000 units compared to 11,4000 units in secondary sales which rose from 74,000 units in 2020. The report also believes that this represents an opportunity for developers with strong balance sheets, including new ventures, to significantly grow their portfolios in Mumbai.

All key developers have already ramped up their plans for the megacity, which may lead to higher pre-sales in the medium term compared to current forecasts.

Although the report is positive on a recovery in the real estate cycle, high valuations and likely higher interest rates keep UBS selective, he warned and stressed that the surge in supply in the medium term will put pressure on the realizations and potentially on the margins as well.

The report also expects that regulatory initiatives to cut approval fees by 50%, relax redevelopment policies including slum upgrading and coastal standards may lead to increased supply. in the megalopolis in the medium term.

A potential increase in supply can keep prices in check overall, and thus expectations around developer margins will need to be rationalized both for existing inventory and perhaps for new projects as well, even with low cost of land.

The report also finds that new and existing companies with strong balance sheets are poised to grow faster, given the limited window of opportunity to contract low-cost projects and their pace of growth depends on the success of their existing projects. (cash flow), ability to grow (balance sheets), intent (history of growth), execution skills and price/product flexibility.

According to the report, the megacity is poised for oversupply with too many projects lined up for the city’s southern Mumbai, Bhandup, Bandra, Andheri and Borivali districts.

The report finds an increase in volume that is already underway in the top seven cities. While a cycle of increasing volumes has already begun, a cycle of increasing prices will soon begin.

Markets such as Hyderabad and Pune are already in a rising price cycle, while Bengaluru and Chennai could follow suit in 2022 if current levels of inventory depletion continue. A potential increase in supply in Mumbai may imply pressure on property prices in the medium term, the report says.

Although the likely rise in interest rates may hurt end-user demand, the report hopes that this will be offset by investor buyers given expectations of higher house prices.

It may be noted that the BSE property index has outperformed the Sensex by 14% so far in FY22, as the market priced in strong growth in pre-sales from listed developers; and a global narrative of the housing cycle recovery.

Most listed developers are trading at 2.6x the 1-year futures premium, a 33% premium to the 10-year average, with Godrej Properties leading the chart at 3.8x the 1-year futures premium. one year or 70% premium.

(Only the title and image of this report may have been edited by Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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