Market Sentiments Revive After 2 Quarters; Outlook Back to ‘Optimistic’ Zone: 23rd Knight Frank–FICCI–NAREDCO Real Estate Sentiment Index Q4 2019

Mumbai, January 14, 2020: After staying in the pessimistic zone (below 50 mark) for two consecutive quarters, the 23^rd Knight Frank–FICCI–NAREDCO Real Estate Sentiment Index Q4 2019 survey shows that the current sentiments of the real estate stakeholders in India have revived to the optimistic zone of 53 in the October-December quarter of 2019 (Q4 2019).

The report further indicates that the future sentiment score, that had gone in the red for the first time in the preceding quarter of Q3 2019, has also bounced back to 59 in Q4 2019. Though in the optimistic zone now, the qualitative outlook of stakeholders remains cautious, with a majority of them opining that the sector will remain at the same levels as previously even while it will not go down further in the next six months.

A score of over 50 signifies ‘Optimism’ in sentiments, a score of 50 means the sentiment is ‘Same’ or ‘Neutral’, while a score of below 50 shows ‘Pessimism’. 

CURRENT SENTIMENTS INCH UP; INDIA INC HOPEFUL FOR THE COMING SIX MONTHS

Source: Knight Frank Research

KEY FINDINGS OF THE SENTIMENT INDEX SURVEY

Current sentiment score

• The current sentiment score has revived in Q4 2019, inching up to 53 and getting back in the optimistic zone after two consecutive quarters.
• A recovery in the current sentiment score hints that the stakeholders are cautiously optimistic as they keep a close watch over the implementation of the slew of measures undertaken by the government to revive the sector.
• Improvement in the current sentiment for the sector is also in line with recent improvement in some macro-economic indicators. For instance, Purchasing Manager Index (PMI) for the services and manufacturing sector improved meaningfully in December 2019. Cement sector growth improved to 4.1% in November 2019 after contracting in the previous 3 months.

Future sentiment score

• The future sentiment score that had gone in the red for the first time in the preceding quarter of Q3 2019 has bounced back to 59 in Q4 2019.
• Though in the optimistic zone now, the outlook of stakeholders remains cautious with a majority of them opining that the market will remain at the same levels and not go down further in the coming six months.
• The real estate sector has been under pressure for over three years now. Weak demand, inventory overhang, developer defaults coupled with the worsening of the NBFC crisis has dried up funding for the sector, which in turn has increased the borrowing cost and impacted finances for the already strained sector.

“The real estate sector sentiments have shown improvement in its current as well as expected outlook for the market in Q4 2019. This optimism is significant in the wake of the continued downslide in India’s overall economic performance. Even while the sector is working towards finding its balance, especially in the residential segment, steps by the government have kept the sector stable in 2019. However, we expect the market to remain cautious and sensitive to even the smallest change as large-scale demand is yet to pick pace,” said Shishir Baijal, Chairman and Managing Director of Knight Frank India.

Shishir further said, “The sector’s optimism is far pronounced for the office sector, which has been growing strength to strength in the past few years, reaching historic highs in 2019. In the next 8 – 10 quarters, if the office, other commercial including retail, warehouse and logistics and the residential sector continue to show positive growth, despite the pace of growth of Indian economy, we can expect the real estate sector to show upward curve of revival. The sector, therefore, needs to start making adequate safeguards to ensure that the demand for all segments stays positive.”

ZONAL FUTURE SENTIMENT SCORE – NORTH AND WEST CONTINUE TO SHOW CAUTION

• The future sentiment score for North moves to optimism after two consecutive quarters of pessimism. Inching to 54 in Q4 2019 from 48 in Q3 2019, the stakeholders in the region are somewhat positive as regards the coming six months.
• Sentiment score for West which had gone in the red for the first time in the preceding quarter has moved up to 55 in Q4 2019. Stakeholders in the West are also in a wait and watch mode and are awaiting the implementation of the AIF that will boost market sentiments in the current credit crunch. 

Source Knight Frank Research

STAKEHOLDER FUTURE SENTIMENT SCORE – DEVELOPERS WELCOME GOVERNMENT INTERVENTION, LENDERS VIGILANT

• Confidence of the developers has somewhat revived in the last quarter of 2019, with the sentiment score that had gone in the red in Q3 2019, boisterously coming back to 59 in Q4 2019 on the back of government interventions.
• This means the stakeholders are optimistic regarding the stimulation of the sector in the coming six months.
• Though the sentiments of financial institutions have revived from the preceding quarter; the stakeholders remain cautious.

Source Knight Frank Research

ECONOMIC OUTLOOK & FUNDING SCENARIO - URGENT POLICY ACTIONS REQUIRED TO REVIVE ECONOMY; CAUTIOUS FUNDING ON THECARDS

• The real estate industry’s sentiment regarding the economy has remained cautious in the fourth quarter of 2019. While 35% of the stakeholders opine that the overall economic situation will be the same in the coming six months, 37% are of the opinion that the trends will get better.
• As far as funding is concerned, stakeholders have taken a positive stance for the coming six months. The survey findings suggest that the stakeholders feel that the flow of funds to the sector will improve in the coming six months.

Dr Niranjan Hiranandani - National president - NAREDCO and Founder & MD- Hiranandani Group, said, “It is from depths that a rise commences and for Indian RE 2019 was a year of potential growth which fell a tad short. Interestingly, the economic outlook for 2020 looks prospective with foreseen growth of Indian real estate turning to be a real game changer. The potential of its multiplier effect on boosting GDP growth in double digit inclusive of employment generation is in cognizant to achieve India's $5 trillion economy dream."

"The emergence of new segments like Logistics, Warehousing, Coworking and Co-living, Rental Housing and Data centres will take centre stage. Residential market shall witness revival sign with an anticipated uptick in demand and clocking sales log. REITs and InVITs shall continue to gain traction among the investors with an assured returns and steady capital flow," he added.  

RESIDENTIAL MARKET OUTLOOK: SECTOR SEES GREEN SHOOTS OF RECOVERY

• Around 74% of the stakeholders have shown a positive outlook for the coming six months maintaining that residential sales will either improve or remain the same but will not go down further.
• Around 79% of the stakeholders opined that residential prices will remain at the same levels or drop further in the coming six months.
• A slew of measures announced by the government like AIF for last mile funding of affordable housing, rationalisation of GST rates, along with liquidity support to HFCs and NBFCs have acted as a shot in the arm for the sector. However, the survey suggests that more targeted solutions are required to further revive the sentiments and invigorate demand.

OFFICE MARKET OUTLOOK: THE BRIGHT SPOT

·         Outlook regarding the office market for the coming six months is on a positive side, which also corroborates the current market trends, which saw an all-time high transaction of 5.6 mnsq m (60.6 mnsq ft) in 2019, signalling the robustness of the market.

·         The future sentiment score regarding the leasing activity is strong with 88% of the stakeholders opining that leasing activity will either improve or remain the same.

·         Maintaining the positive momentum, a majority of the stakeholders have opined that new supply will enter markets across geographies. According to Knight Frank Research, the supply momentum was strong in 2019, with close to 5.7 mnsq m (61.3 mnsq ft) of office space getting delivered during the year.

·         91% of the stakeholders expect rents to either remain at the current levels or firm up in key office markets.

Sanjay Dutt, Managing Director & CEO, Tata Realty & Infrastructure Ltd., Chairman, FICCI Real Estate Committee, “The fortunes of the country’s real estate sector can be distinctively identified with two broad drivers - domestic and global consumption. The dynamics of these two explain the contrasting outcomes of its residential and commercial real estate market. While the commercial office segment has strengthened further and achieved the highest ever demand benchmarks at 60 mnsq ft across the top 8 cities in 2019, the residential overall market at 245,000 (3 quarters) housing unit seems to be improving in the affordable segment only. The rest of the segments and overall hang of inventory still remains 33-40 months. In case of the office market, with robust captive space demand from global corporations are in place. While the information technology sectors’ cost effectiveness metric for commercial properties is just right, it is also encouraging to see that the Non-IT Sector is over 50% of the total absorption. Tailwinds from global growth in demand for information technology applications across sectors will further improve this momentum and we see a sustainable office demand in the near future.

Sanjay further added, “On the other hand, the mainstream residential market needs greater support to commence a recovery anytime soon. It remains a mixed bag with some improvement seen in the affordable and mid residential segment on account of a large end user demand base, which is being rekindled with government incentives and very encouraging monetary policy interventions. An improving ecosystem that is focused on execution, oriented on cash flow and working in tandem with the RERA only points to a much stronger supply side for the times to come. Having said this, stakeholders should come to terms with the fact that it is going to be a long drawn affair and it would take at least 5 years for all interventions and course corrections that the industry has embarked upon to have a meaningful impact on the residential market.”