Current mortgage interest rates are still low and unsustainable: Shishir Baijal of Knight Frank India

Home buying is seeing a strong rebound after the pandemic and despite rising construction costs, demand has remained steady, says Shishir Baijal, chairman and managing director of Knight Frank India.

Cycles of lower interest rates on home loans are also likely to end soon, but that might not impact demand because people are already priced in, he says.

In an interview at Activity area, he talks about real estate sales, improving demand for workspace as offices open up, and new asset classes that are gaining interest lately. Excerpts:

Do you foresee a change in pensions or interest rates?

The buzz in the market is that RBI will enter for another 50 basis point hike in the repo rate this time. But, I can’t give a timeline for that. Current home loan interest rates are still low and certainly not sustainable in the long term. Rate hikes are therefore imminent; now or later. We expect another 50 basis point hike is in sight.

Will another rate hike impact demand for home sales?

Home sales rebounded strongly after the second wave and continued despite the Omicron. Apart from some delays in decision-making, Omicron has not blocked sales. Previous rate hikes by the RBI also came into play; but their impact on demand is not yet visible.

In fact, domestic demand could see a 3-5% increase in April-June, qoq.

Even if interest rates were to rise in the short term, there is unlikely to be a significant impact on demand. People factored building material price increases into house costs; taking into account the impact of interest rates is therefore not improbable either.

For example, house sales in Maharashtra were lower in May compared to April and March. May is considered an all-time low sales month and was also the time the state government imposed a 1% tax on home sales beginning April 1. Now, if I do a comparison between May of this year and May of last year, the sales are standing. Thus, an exact apple-to-apple comparison is not always possible.

Are builders ready to pass on the benefits after the Center’s anti-inflationary measures?

Home prices rose at least 1-7% in all cities from January to March, both year-on-year and year-on-year. In some micro-markets the increases were larger – for example in the NCR or Pune. So if government intervention pays off and inflationary pressures ease, especially construction costs, developers will have to pass on the profits. In addition, there is a strong demand for ready-to-move-in homes and therefore the impact of rising prices is quite muted.

How has the demand for office space evolved?

Absorption is progressing steadily and this segment will soon be the engine of the real estate sector. In 2019 (CY), absorption was 60 million square feet; and in 2021 (CY) it was 40 million. Hiring has increased in all sectors and offices are reopening; the requirement is for larger workspaces that are spread out. We should therefore reach pre-pandemic levels within the next two years, if not sooner.

With this market reaching or improving on pre-pandemic numbers, interest in REITs will increase. People will be attracted by the stable income generated by REITs and the quality of the assets they manage.

And will demand for alternative asset classes continue?

If by that you mean coworking spaces, then that’s another high-growth sector. Flexible spaces have grown in popularity among occupiers and now, with hybrid work schedules, many are expanding into new Tier II markets, which makes sense.

Warehousing will grow with the growing popularity of e-commerce and data centers are being aggressively explored by several big names.

Published on

June 06, 2022

Dorothy H. Lewis