The latest edition of Knight Frank-Naredco Real Estate Sentiment Index Q3 2022 (July-September 2022) report cited that the current sentiment score has declined marginally from 62 in the second quarter (Q2) of 2022 to 61 in the third quarter (Q3) of 2022 on account of the economic scenario playing out globally.
The current sentiment index score has scaled down, primarily because of the dark global economy and the current geopolitical risk due to the Russia-Ukraine war. Although it has declined marginally, it still shows optimism since perception of the Indian economy and the real estate remains resilient thus far.
The future sentiment score, which measures stakeholder perceptions for the real estate sector over the next six months, has decreased from 62 in Q2 2022 to 57 in Q3 2022. As inflation remains high in India, tightening monetary policy measures and an adjusted economic growth forecast have altered the stakeholder sentiment for the next six months.
Both the current and future sentiment scores have remained mild despite the fall. The current sentiment index score and the future sentiment score have moderated in Q3 2022 as stakeholders exercise caution as the impact of the global economic headwinds on Indian economy is yet to play out. Additionally, the housing affordability has shrunk further after the repo rate hike in September 2022.
Future sentiment score hints at a decline in housing market momentum in Q4 2022
Since the inception of the real estate sentiment index, the future sentiment score has largely remained above 50, indicating the prevalence of a positive homebuying sentiment in the market. In the past four years, multiple market forces have impacted the sentiments of both homebuyers and developers. Per our analysis, the overall volume witnessed across the top eight Indian cities each quarter mirrored the trajectory indicated by the future sentiment score in the preceding quarter.
Compared to residential sales which show a high correlation since the real estate sentiment index survey captures the perception of the supply side stakeholders, residential launches have an even higher degree of sensitivity to future sentiment score. Per findings of our analysis, 65% and 62% variation in residential launches and sales respectively, can be explained by the future sentiment score.
The volume of residential sales and launches which have declined sequentially from Q2 2022 to Q3 2022, are likely to shrink further in Q4 2022 on both parameters. This is not surprising, as the impact of the cumulative repo rate hike of 190 basis points is yet to be passed on fully to homebuyers, the festive period discounts on home loans will no longer be available after October 2022, and the geopolitical tensions and inflationary risks will continue to persist in the foreseeable future.
Correlation of future sentiment score with performance of key market indicators
In the past 16 quarters, Q2 2022 witnessed the highest residential sales volume and number of new units launched in the top eight markets as coming out of the pandemic, we witnessed a homebuying frenzy like never before. The future sentiment score of 75 in Q1 2022, which was an all-time high for the sentiment index, also predicted the same trajectory. This reflects in the high correlation of sentiment score with housing sales and launches.
Compared to residential sales which show a high correlation since the real estate sentiment Index survey captures the perception of the supply side stakeholders, residential launches have an even higher degree of sensitivity to future sentiment score. Per findings of our analysis, 65% and 62% variation in residential launches and sales respectively, can be explained by the future sentiment score.
The developer future sentiment score witnessed a significant decline from 61 in Q2 2022 to 53 in Q3 2022. Although the developers remain optimistic about the following six months, they are concerned about demand translating into new house purchases because of the increasing cost of home loans. The developers are concerned because the cumulative 190 basis point increase in the repo rate for 2022 has resulted in a 70-100 basis point increase in home loan rates so far this year. The Non-Developer Future Sentiment Score has declined from 64 in Q2 2022 to 60 in Q3 2022. Institutional investors’ outlook remained strong yet watchful for the next six months.
Shishir Baijal, chairman and managing director, Knight Frank India, said, “The extensive changes in the geo-political environment outside has pared down the overall growth across all economies. Despite the retardation in the growth pace, India remains as the highest GDP growth in the larger economies. The real estate sector over the past few quarters continues to be strong. However, because of the headwinds caused by the high rate of inflation and geo-political tensions, the Future Sentiment Index has shown a marginal decline and that could influence the developers’ sentiment in general in the next few quarters.”
Rajan Bandelkar, president, Naredco and director of Raunak Group, said, “A resilient housing sector has been consistently growing in housing sales and volumes for the past several months and has shown resilience despite the global uncertain economic conditions and soaring inflation. Despite inflationary pressures, prospective homebuyers will continue to invest in the market. The market has several reasons favoring homebuyers. After increasing the repo rate sequentially over the past few months, the RBI will likely increase the key policy rate again in December. But the sequential rise in repo rate has very little impact on mortgages in the affordable housing segment. First-time homebuyers will also receive tax incentives to buy now. With an abundant supply of good-quality housing projects, homebuyers can strike a good bargain while transacting.”
Residential market outlook
In Q3 2022, 44% of the survey respondents expect residential sales to increase in the next six months. This is in sharp contrast to Q2 2022 when 24% of the respondents held a similar view.
Stakeholder sentiments about residential launches have remained largely similar to the Q2 2022 period. In Q3 2022, 76% of the stakeholders expect residential supply to either increase or remain stable in the next six months while in Q2 2022, 77% shared a similar view.
In the current quarter, 41% of the survey respondents expect residential prices to increase in the next six months. In comparison, during Q2 2022, only 34% of the survey respondents had a similar take.
The outlook for office leasing continued to strengthen in Q3 2022. In contrast to 29% in Q2 2022, 44% respondents in Q3 2022 feel that office leasing in the next six months will continue to rally.
In Q3 2022, 48% survey respondents expected office supply to improve in the next six months. In the previous quarter, 31% survey respondents had a similar opinion. With office leasing improving, office supply is also being ramped up by developers steadily.
As transaction volumes have remained high, the stakeholder outlook for office rents has also improved. In Q2 2022, 43% of the survey respondents expected office rents to increase, whereas in Q3 2022, 53% of the survey respondents held the same opinion.
Despite tightening government policies in world’s major economies and an overall slowdown, the outlook for the Indian economy remains stable in Q3 2022. This is largely because the impact of the geopolitical risks is visible in the lower growth expectations for India, but it will continue to grow robustly in 2023.
As the current economic environment unfolds, 42% of survey respondents in Q3 2022 expect the overall economic momentum to increase in the next six months.
Despite the turmoil globally, stakeholders are confident of the investment activity remaining stable in the real estate sector in the next six months. In Q3 2022, 42% survey respondents are of the opinion that funding availability will remain the same, while 37% expect funding availability to improve.
