Massive demand, supply, price upcycle await Mumbai’s real estate: Report
The Mumbai property market that accounts for 10 per cent of national volumes, 23 per cent of sales and a third of the margins, is on the cusp of a historic upcycle on all fronts, having already hit a decadal high of new or primary sales in 2021 selling 38,000 units despite the pandemic-induced disruptions, says a report.
This also has the city civic body BMC netting around a whopping Rs 14,200 crore in 2021 as building permission charges, up 5x from the previous year, as developers have been making a beeline to make it big in the country’s most profitable market, UBS Securities India said in a weekend report.
The upsurge in the demand and supply and also in seeking permission also were driven by recent regulatory initiatives; like 50 per cent cut in approval charges, led to a 150 million square feet (msf) of new development rights approved in 2021 over 2020, and new residential supply of 33 msf, implying a supply surge in Mumbai over the medium term which will have pricing and margin implications for developers as well, says the report.
According to UBS, Mumbai is the country’s most profitable property market with the megapolis contributing as much as 33 per cent of margins–Rs 22,500 crore of Rs 69,100 crore; 23 per cent or Rs 75,000 crore of Rs 3,24,200 crore in annual sales revenue; and around 10 per cent or 38 million sqft of 393 million sqft of supply in 2021.
The year also saw the primary sales hitting a decadal high in the megapolis with 38,000 units as against 11,4000 of secondary sales units which rose from 74,000 units in 2020. The report also feels that this presents an opportunity for developers with strong balance sheets, including new companies, to meaningfully grow their Mumbai portfolios.
All key developers have already intensified their plans for the megapolis and this can drive higher pre-sales over the medium term as against current forecasts.
While the report is positive on a property cycle recovery, high valuations and likely higher interest rates keep UBS selective, it warned and pointed out that mid-term supply surge will pressure realisations and potentially margins too.
The report also expects the regulatory initiatives of slashing approval charges by 50 per cent, easing of redevelopment policies, including slum rehabilitation and coastal norms, can drive a supply surge in the megapolis over the mid-term.
A potential supply surge can keep prices in check overall, and so expectations around developer margins will have to be rationalised both for existing inventory and perhaps also for new projects even with low land cost.
The report also believes new and existing firms with strong balance sheets are poised to grow faster, given the limited period of opportunity to contract projects at low costs and their pace of growth depends on the success of their existing projects (cash flows), ability to grow (balance sheets), intent (growth track records), execution skills, and pricing/product flexibility.
According to the report, the megapolis is set for an oversupply with too many projects lined up for south Mumbai, Bhandup, Bandra, Andheri and Borivali areas of the city.
The report sees a volume upcycle that is already underway in the top seven cities. While a volume upcycle has already begun, a pricing upcycle will start soon.
Markets such as Hyderabad and Pune are already in a pricing upcycle, while Bengaluru and Chennai could follow suit in 2022 if current levels of inventory depletions continue. A potential supply surge in Mumbai can imply pressure on property prices over the medium-term, says the report.
Though the likely jump in interest rates may hurt end-user demand, the report however is hopeful that this will be offset by investor buyers given expectations of higher property prices.
It can be noted that the BSE realty index has outperformed the Sensex by 14 per cent so far in FY22 as the market factored in listed developers’ strong pre-sales growth; and an overall property cycle recovery narrative.
Most of the listed developers are trading at 2.6x one-year forward premium, which is at a 33 per cent premium to the 10-year average, with Godrej Properties leading the chart trading at 3.8x one-year forward premium or 70 per cent premium.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)