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Real Estate Sector Expresses Cautious Optimism: Ficci-Naredco-Knight Frank Real Estate Sentiment Index

by Suman Gupta

  • Residential prices expected to remain contained, while launches and sales expected to pick pace
  • Outlook for office sector remains optimistic
  • The turbulent funding environment viewed as turning positive in the calendar year

Mumbai, February, 2019: Knight Frank India in association with National Real Estate Development Council (NAREDCO) and the Federation of Indian Chambers of Commerce and Industry (FICCI), today released the Real Estate Sentiment Index, which broadly captures the overall perceptions and expectations of industry leaders. The report is based on a survey of, besides others, over 150 stakeholders of the Indian real estate sector including leaders from the development and financial side. The survey indicates that for the next six months, the sector has a positive outlook on account of the stable policy environment post introduction of structural reforms implemented in 2017. Further, it notes that there is general optimism around the launches, with the hope of a gradual upward incline. The stakeholders have opined that the buyers are still in the wait and watch mode which will dampen sales.  Future sentiments for price appreciation, however, remained marginally down, indicating that the sector does not expect any price rise in the coming six months.

Shishir Baijal, Chairman and Managing Director, Knight Frank, India said, “The real estate sector has shown signs of controlled optimism in the recent survey. A majority of respondents remained moderately positive towards the state of the economy for the next 6 months. However, it should be noted that the sentiments are in a decline compared to the previous periods of the survey. Based on our survey, the respondents expect real estate sector to witness gradual growth in the coming six months. The future sentiments for both major asset classes, i.e. residential and office, are expected to be moderately positive. The stakeholders show positivity with regard to new residential launches on the back of increasing clarity of policy. Nevertheless, it is to be highlighted that the sentiment for pricing remains negative, implying an anticipation of further decline in residential prices over the next 6 months.’

OVERALL CURRENT AND FUTURE SENTIMENT SCORE

  • The current sentiment score inched upwards and remains in the positive in Q4 2018. The slight improvement in the current score indicates that the dust has started to settle from the implementation of various structural reforms in the second and third quarter of 2017. The score indicates that stakeholders are in a wait and watch mode on the outcome of the long-term policy initiatives of the government.
  • On the other hand, the optimism regarding the future of the real estate sector has come down by three points. Factors such as the looming uncertainty over the upcoming elections has been reflected in the future sentiment score.

FUTURE SENTIMENT SCORE

  • Though transitory in nature, stakeholder sentiments in the coming six months have taken a slight dip in our survey findings of Q4 2018.
  • The future scores across the regions indicate that stakeholders are holding their ground and are not as bullish over the outcome of various structural reforms in the real estate sector. The uncertainty over the overall economic scenario and the upcoming general elections in India has failed to infuse any confidence in the stakeholders.
  • The future sentiment score for north has gone in the red in Q4 2018. This dip in sentiment for the coming six months stems from the lack of buyer confidence in the market. Accumulating inventory, stagnant prices and sluggish sales and default by reputed developers have contributed to the further dip in the national capital regions future sentiment score.
  • On the other hand, the future sentiment score of the west has moved up significantly in Q1 209 compared to the same period in 2018. We believe that the way RERA has been implemented in the west zone particularly in Maharashtra has infused confidence in the stakeholders and it is evident in the future score for the region.
  • Though the future sentiment score of South has dipped in Q4 2018, it still remains in the positive, and we see that stakeholders are positive for the next six months.

STAKEHOLDER SENTIMENT SCORE

  • Sentiments of the financial institutions regarding the future of the real estate sector in the coming six months has come down in Q4 2018 compared to the same period in 2017. However, on the developer side, even though the future score has waned marginally, it still remains in the optimistic zone.
  • The real estate industry’s sentiments with respect to the economy do not show any substantial change from 2019. The stakeholders are taking time to give thumbs up to the economic performance of the country given the current political scenario.
  • On the other hand, the stakeholder sentiments regarding the funding scenario are upbeat in Q4 2018.

RESIDENTIAL SECTOR LACKS CONFIDENCE

  • Majority of the stakeholders have expressed optimism regarding the new residential launches coming up in the next six months. Nearly 78% of the stakeholders have opined that the sector will see new launches in the coming six months, mainly on the back of the mid and affordable segment. Insights suggest that with the clarity brought about by the structural reforms, notable developers are keen to bring fresh supply in the market.
  • Majority of stakeholders believe that residential sales will improve in the coming six months.
  • The future sentiments regarding price appreciation have remained stagnant in Q4 2018 as well. About 74% of the stakeholders have opined that the prices will either remain stagnant or may even drop further to attract the fence-sitting buyer in the coming six months.

The real estate sentiment index is developed jointly by Knight Frank (India), the Federation of Indian Chambers of Commerce and Industry (FICCI) and National Real Estate Development Council (NARDECO). The objective is to capture the perceptions and expectations of industry leaders in order to gauge the sentiment of the real estate market.

METHODOLOGY

The real estate sentiment index is based on a quarterly survey of key supply-side stakeholders, which include developers, private equity funds, banks and non-banking financial companies (NBFCs). The survey comprises questions pertaining to the economy, project launches, sales volume, leasing volume, price appreciation and funding. Respondents choose from the following options, for which weights have been assigned: a) Better (100 points) b) Somewhat Better (75 points) c) Same (50 points) d) Somewhat Worse (25 points) and e) Worse (0 points). The index is determined by calculating the weighted average score of the percentage of responses in each of these categories. Hence, a score of 50 represents a neutral view; a score above 50 demonstrates a positive outlook; and a score below 50 indicates negative sentiment.

In order to present a holistic view of the real estate industry, the report is divided into two sections. Section A comprises two indices: the overall current sentiment index that indicates the respondents’ assessment of the present scenario compared to six months prior, and the overall future sentiment index that represents their expectations for the next six months. Section B focuses only on the future sentiments of the stakeholders. This survey was conducted between January–March 2019.

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