Why Developers should focus more on Micro-homes
Real estate sentiments have moderated due to high inventory overhang and softening of demand of late. This has been further undermined by policy contingencies around RERA and the demonetization drive. However, as RERAstarted to move out of the policy contours, it was instrumental in reigniting the confidence level in the Indian housing market. In most of the major Indian metros, developers are back with new launches in the pipeline. Likewise attractive schemes are rolled out to further incentivize real estate purchases.
However, the structural decline that the residential markets recently witnessed will not be reversed soon. Most of the developers are still working on wafer thin margins, which are further being squeezed due to GST impositions. Despite growing positivity, rise in property prices are still expected to be modest in the foreseeable future. This will further deter the investor class,leading the market dynamics to be mostly end user driven.
New Concepts – Small is Beautiful
At a time when profit margins are narrowing down, it is imperative for developers to come up with new concepts.Going forward, success would rely largely on translating carefully created expertise into industry defining practices. As one of the most populous and largest economies in the world, there is no dearth of potential in the Indian market. However, developers need to enter new verticals, tap into new markets and design new products that are in sync with evolving demand patterns.
Downsizing could be a possible solution.At the onset of the current decade in some of the major markets in the world such as LA, NYC, London, Tokyo etc. there was huge unmet demand for housing. However, the market was still reeling under the subprime crisis and average bandwidth to invest was limited. To tackle the problem many developers started coming up with small sized homes called micro-homes or tiny homes. Sized between 150 to 350 Sq. Ft, these were mostly located in the downtown areas and prime locations of the city. Targeted at young professionals and students for whom location is preferred over square feet, these small units were an instant hit. They offered a suitable solution to the housing needs of the millennial population that mostly hovered northwards of 40% of the city population and represented huge demand.
Potential in India
Aligned with evolving global trends, micro-homes or micro-apartments have started to expand its foothold in India as well. Although the market is in its nascent stage at the moment, some of the major developers such as Artha, OCUS, Supertech etc. have launchedmicro projects recently. At a time when bigger units are suffering from compression in sales volumes, the market has been highly conducive for smaller units. Some projects have shown 100% inventory turnaround within a few days of their launch. Due to a rise in preference for smaller units, YOY, average ticket sizes have shrunk in the current FY, both across NRI as well as domestic segments. Interestingly, the degree of downward dip is steep in the NRI segment.
The explosive response in the market has been primarily driven by the young millennial Indian population that today represents formidable economic potential. Currently the Indian millennial population is sized at over 400 million with an annual consumption of around USD 330 billion. Similar to their western counterparts, they seek constant appreciation of real estate? and are inclined towards experiential living.
Likewise, the rental returns are also attractive backed by attractive demographic dividend. Although there is no pan-India study on rental returns, a study conducted by 360 Realtors suggests that smaller units such as studio homes clock much higher gross rental yields when compared to 2 and 3 BHK units.
As most of the apartments generally come within a budget range of 25-35 lacs, it also falls within the sweet spot of the millennial population. The initial down payment (~ 1.5 Lakhs) is also comparatively low. At a time, which is marked by ultra short debts but refined tastes, it is natural that younger households will gravitate towards smaller,swanky units.
Hence, in order to cater to the evolving buyer’s preference, it is imperative for developers to focus more on smaller units such micro or tiny homes, which have higher chances of boosting their sales volume. Like other global metropolises, a sizable part of the demand will be concentrated around the central locations of Indian cities. However, even in peripheral locations, micro-units will find takers, provided there are employment catchments nearby to feed demand.