RBI survey: East comes up as a better market for housing companies
Housing demand remains skewed in favour of regions with greater economic viability and affordability. No wonder, Bhubaneswar is leading the charge.
Sachin Pal
Moneycontrol Research
Highlights:
- Housing affordability has worsened in recent years
- Industrialisation has had an inflationary impact on real estate
- Central and eastern regions are the most economical
- Demand trends skewed towards affordable segments
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The Reserve Bank of India (RBI) published its quarterly report on residential asset price monitoring survey (RAPMS) last week. The report reveals that growth in credit driven by buoyant market conditions has had an inflationary impact on the housing prices across geographies and this resulted in worsening of house price to income (HPTI) ratio, which increased to 61.5 in March 2019 from 56.1 in March 2015. The score is calculated based on the credit metrics shared by banks and housing finance companies across 13 cities.
HPTI gives a directional view
The ratio is an indicative measure and it gives a directional insight towards purchasing power of its residents. Direct comparison across cities is not practical as housing prices and salary levels vary based on demand-supply dynamics, industrialisation and employment opportunities available in its city. For instance, Bhubaneswar is a manufacturing and industrial hub owing to availability of abundant natural resources. In contrast, Bengaluru is a major IT outsourcing hub and is more service oriented in comparison to the former.
Bhubaneswar leads, Mumbai lags
Bhubaneswar, the capital of Odisha, outperforms other cities in terms of affordability. The city has the lowest median HPTI ratio of 54.3, which means that cost of purchasing a house would be nearer to 54 times the monthly salary of the individual.
Rapid infrastructure development in Hyderabad has resulted in a steep rise in HPTI ratio (both in percentage terms and absolute terms) as industrialisation has had a positive impact on the land and property prices.
Mumbai remains most expensive city for homebuyers and ranks worst in terms of affordability. Cost remains the biggest deterrent as the unsold inventory in India's costliest real estate market – Mumbai Metropolitan Region (MMR) – continues to remain at elevated levels, with over 2.2 lakh units being unsold as of September 2018. Housing inflation continues to soar in the financial capital of India and the market is nearing saturation as the HPTI ratio has been hovering above 70 levels in the past 4 years.
Ahmedabad ranks second from bottom with a score of 70.4. However, its affordability is much higher as the real estate prices are 30-40 percent lower than Mumbai in absolute terms.
Demand linked to affordability
The survey result confirms that the demand remains skewed to regions with greater economic viability and affordability. Eastern (Kolkata, Bhubaneswar) and Central (Lucknow, Bhopal) belts are more economical in comparison to the western belt (Mumbai, Pune and Ahmedabad) and are seeing huge investments from corporates and industrial houses. Besides, continued government spending on infrastructure and housing segments is enabling faster growth in these cities and regions, which was previously lagging due to unavailability of basic facilities and amenities.
At a regional level, Bihar has been the fastest growing state in the country in recent years. Its economy accelerated further in FY18 and clocked 11.3 percent Gross State Domestic Product (GSDP), up from 9.9 percent in the previous year. West Bengal also featured among the fastest growing states. Its GSDP growth surged to 9.1 percent in FY18, from sub-5 percent in the year ago period. In contrast, Madhya Pradesh and Odisha lost some momentum as their growth moderated last from above 10 percent in FY17 to around 7 percent in FY18. Despite the recent slowdown, their growth continued to be strong and was much higher than national average.
Corporates are also singing the same tune. The management of Asian Paints, the largest paint manufacturer in the country, during its annual analyst meet in 2019, indicated that the demand for paints has been stronger in the eastern parts of India (Bihar, Jharkhand, West Bengal and Odisha) in comparison to other regions. Similarly, cement companies operating in the central region (Heidelberg Cement India and Birla Corp) have seen strong volume off-take in the past 12-18 months owing to the strong demand across segments.
Capacity expansion to capture demand
Given the low levels of market penetration and ample headroom for growth, a number of companies are eyeing market expansion in the central and eastern markets through capacity expansion and expansion of distribution network.
Cement manufacturer Dalmia Bharat is planning to fortify its presence in the eastern market by doubling its regional cement manufacturing capacity to 17 million tonnes in the next 24 months at a at a total investment of Rs 3,500 crore. Similarly, Tamil Nadu-based Ramco Cements is also scaling up its presence in southern and eastern markets and planning to enhance its capacity to 20 million tonnes (from 12.5 million tonnes). Ramco has recently completed the expansion of its grinding unit in West Bengal and its new plant in Odisha is expected to commence commercial operations in H2 FY20. Besides, the company is setting up another plant in Andhra Pradesh which should go on stream by FY21-end.
Other building material players such as pipe manufacturers are also expecting a pick-up in consumption in these areas. PVC pipe manufacturer Finolex Industries has set up regional offices and warehouses in Indore (Madhya Pradesh) and Cuttack (Odisha) to gain foothold in central, eastern and north-eastern markets. Astral Poly Technik, leading CPVC pipes manufacturer, is also exploring various opportunities to set up a manufacturing plant in the East.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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