Pent-up demand in real estate will continue in 2023: Knight Frank India

Indian real estate will grow at the pace seen in 2022 but global uncertainties will likely continue for a couple of quarters more, said two senior executives of Knight Frank India. The government's push for infrastructure projects is helping growth in cities, Shishir Baijal, chairman & MD of the company, and Gulam Zia, senior executive director-research, advisory, infrastructure and valuation, at the real estate consultancy firm.

Here are edited excerpts from their interview, conducted over Zoom, with Pratigya Yadav.

How did the realty sector do in 2022 and what do you expect in 2023?

2022 was perhaps the first time in more than a decade when all segments, including warehousing and retail, did remarkably well despite a substantial amount of headwinds including slowdown in the global economy, Russia-Ukraine war, high inflation witnessed in the last six months. The residential sale is expected to continue the same momentum with an annual growth rate of around 34 per cent as most parameters are expected to remain favourable, including levels of inflation that is expected to start stabilising by mid of 2023.

The inflection point that really happened in the sector was during the pandemic when buyers' perception changed towards consumption and that gave a trigger to pent-up demand with the increased affordability. This pent-up demand would continue in 2023 too.

Which segments performed well in 2022?

All segments did extremely well. The residential sales recorded a 9-year high and registered a yearly growth of around 34 per cent with sales of 312,666 units. Affordable housing also did better than previous years. Sales share in the Rs 5-10 mn (million) segment saw an increase of 2 per cent over the same period, last year.

Premium segment has picked up very well in terms of absolute value and its share after a prolonged sluggishness of 5-6 years. Overall, the housing sales registered a yearly growth of around 15 per cent.

What led the office sector to be the emerging segment in 2022; will it continue?

Despite geopolitical challenges, the office sector saw a strong recovery in demand and saw a rise of 36 per cent YoY (year on year). In fact, this is historically the second best year for office transaction volumes with peak achieved in 2019.

The co-working and flex spaces contributed the most and witnessed a rise of 3 per cent in the gross leasing in the second half (H2). Till the environment remains in a state of flux, these co-working spaces would continue to grow. The growth of co-working as a segment has been phenomenal and perhaps a far better performer than the rest of the segments.

How do you see the sector’s growth in tier 2 and 3 cities?

Five or six years back, we used to look at the urban centres as the focal point of real estate growth, and that has started changing in the last two-three years. Post Covid, with the work from home becoming a norm, the occupiers shifted their focus to such cities as the idea of work from home has found an absolute bearing in the minds of the occupiers and the corporate real estate leaders.

Also, the government's push for infra projects in the last few years has also helped the growth of such cities with high speed express corridors, dedicated freight corridors leading to more job creations in industrial, warehousing or logistics.

A couple of multi-modal logistic parks have already been initiated. At least 7-8 more are on the card and most of these are closer to tier 2 and 3 locations.

How did the warehousing sector do in 2022; what are its prospects?

In 2022, we saw a 25 per cent increase in the warehousing space, from absorption of 40 million sq ft to 50 mn sq ft, but that is just a tip of the iceberg. This sector would penetrate more as with the emergence of 5G, e-commerce penetration has increased.

Another trend that this sector has witnessed is the emergence from grade B to grade A warehousing. Though the cumulative annual growth rate of warehouse leasing in India is expected to be 15-20 per cent in the next 18-24 months, the sector is already witnessing a slowdown when compared to the growth seen in FY22.

Why did private equity (PE) investments decline in 2022 and which sectors contributed to it?

In 2022, PE investments saw a decline of around 17 per cent as in the second half of the year the recessionary trends started looming around in many of the countries from where the money was coming in and with global uncertainties many of the fund investors decided to invest with more clarity. The declining trend will stop now as people will start taking their investments sooner or later, but at this point of time they are more representative of the capital markets worldwide, nothing to do with India specifically.

Will we witness more rate hikes in 2023, like last year?

We already had witnessed an increase of 225 basis points in the last six months; this has dropped the inflation levels down to below 6 per cent. Though the inflation levels are still higher than RBI’s mandate, the rate of inflation has come down closer to 200 basis points. I think the rate hikes might continue at a smaller pace in terms of the levels increased.