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Harsha Jethmalani

Why luxury housing sales are on solid ground despite rate hikes

Real estate stocks have been on a weak footing in the recent past. The Nifty Realty Index has dropped by nearly 14% so far in CY22.

“The focus of real estate developers, especially in the large ticket housing units, say over Rs10 crore, is on cash flows. So, a lot of unsold inventory in key markets of Mumbai, Chennai and Delhi at prime locations, is exhausting," Siva Krishnan, managing director, Chennai and Coimbatore, and head, residential services, India, JLL.

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A property is classified as luxury based on many parameters such as its location and size. The average monthly rentals in the prominent luxury micro-markets across the top seven cities in India, increased 8-18% in the last two years (H1CY20-H1CY22), showed data by property consultant Anarock. This is for luxury homes of minimum 2,000 sq. ft. area. Further, Anarock’s research shows that in H1CY22 itself, 25,680 luxury housing units were sold across the top seven cities. In CY2021 and CY19, this number stood at 21,700 and 17,740, respectively.

As such, luxury sales are not really impacted by interest rate vagaries, otherwise a key variable for realty sales momentum. After all, the customer base for this segment includes non-resident Indians and high net-worth individuals.

“The luxury residential segment is more or less immune to interest rate hikes," said Anuj Puri, chairman, Anarock Group. “It (luxury homes) also scores high with NRIs due to the depreciating rupee translating into greater buying power," he said.

The robust trends in the luxury residential space are likely to hold ground. In contrast, sales in the affordable housing segment have borne the brunt of the pandemic. The purchasing power of buyers, which mostly comprises middle-income groups, was hurt by covid-led lockdown. Now, rising home loan rates are expected to keep sales of affordable housing muted.

“One theme that has emerged after covid is that the big are getting bigger. Within the realty sector, affordable housing sales have suffered while luxury is picking-up at a decent pace. This is another example of a K-shaped recovery. Top management of many start-ups/unicorns are also among the emerging client base of luxury housing sales," said an analyst with a foreign brokerage house requesting anonymity.

Luxury homes could also be considered as inducements or a symbol of status. An interesting trend, which has emerged after the covid outbreak is that the YOLO factor (you only live once) is driving sales in the luxury segment, Krishnan said. “Overall, the outlook for luxury residential sales and rentals is positive and we see the current momentum sustaining," he said.

Among the listed developers, DLF Ltd, Macrotech Developers Ltd (Lodha), and Oberoi Realty Ltd have exposure to the luxury residential segment. Given that ready inventory is exhausting, commentary by management on new launches for this segment would be key in the upcoming earnings season.

Meanwhile, real estate stocks have been on a weak footing in the recent past. The Nifty Realty Index has dropped by nearly 14% so far in CY22. With the Reserve Bank of India expected to deliver another 50 basis points interest rate hike this week, further downside risks for realty stocks cannot be ruled out.

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