Pune real estate market grappling tough times, unsold inventory valued at Rs. 1.05 lakh cr as on Sept’19

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Pune, November 15, 2019: One of the key residential real estate markets in the country, Pune has been passing through a difficult phase since quite some time now. Real estate rates appreciation, which had been healthy till 2012-13, has largely turned stagnant thereafter.

As per an ICRA note on Pune’s real estate market, significant regulatory developments, changing financing environment and weak demand has been affecting the real estate prices. Further, deferment of purchases from buyers and preference for ready apartments is also a trend observed in Pune in line with other key markets in the country and the same is putting pressure on developers’ cash flow position.

Historically the Pune market has been resilient. It used to attract a lot of investors in the past due to comparative affordability and healthy price appreciation. However, dwindling demand from investors due to limited returns over the past few years and uncertainties in the economic environment has impacted the market.As the city’s economy is also critically dependent on IT/ITeS and automobile,favourable demographic profile of young workforce and matching supply with reasonable pricing had ensured conducive environment for the Pune residential real estate.

According to Mr. Anand Kulkarni, Assistant Vice President and Associate Head – Corporate Ratings, ICRA, “Significant pressure on key user industries and waning investor demand have impactedthe residential real estate market in Pune and sales velocity is likely to remain slow in the near term. The market is undergoing structural change and unorganized local developers are struggling to adjust with the changing operating environment. Resultantly, we expect that the process of consolidation in the Pune market will be accelerated, wherein large players with demonstrated track record of timely delivery, higher brand equity and healthy balance sheets will strengthen their market position. The Pune market has already witnessed a few large deals in the recent past and the trend is likely to continue.”

ICRA has analysed 2,800 ongoing projects in Pune metropolitan region having total of 2.8 lakh units and over 178 million square ft (msf) of carpet area. West and East are the largest micro markets in Pune primarily driven by considerable employment opportunities. Further, connectivity to Mumbai Pune express highway and airport are the key drivers for the West and East markets respectively. North and South West micro markets are primarily driven by industrial establishments and affordability related demand respectively. South East micro market supply is driven by presence of large townships and few IT/ITeS establishments.

Major real estate development in Pune metropolitan region has been happening in the outskirts of city area due to affordability and land availability. Furthermore, in line with slowdown in the industry and increasing inflationary pressures, developers are reconfiguring the apartments with smaller sizes in order to keep the ticket sizes affordable. Resultantly, out of total units under construction, around 77% are under Rs. 75 lakh.

“Pune market has seen considerable increase in number of new launches in FY2019 after weak launch pipeline in FY2018 due to demonetisation, RERA implementation and GST. The buoyancy, however, is not reflected in sales performance wherein the units sold remained stagnant for last several quarters. Resultantly, ICRA estimates the unsold inventory in the ongoing as well as completed projects in Pune market at ~Rs. 105,000 crore as on September 2019. The inventory is estimated to be at a high level of 15 quarters-to-sell.The number of unsold units in Pune market is high at 56% for total ongoing projects,” adds Mr. Kulkarni.

The key infrastructure projects under implementation in the region include Pune metro, ring road, hyperloop and new airport. After initial delays in project approval, the metro project has gathered momentum over the last two years and the work is progressing well on two out of three approved corridors. North micro market will be the medium-term beneficiary of the metro line 1 while East and South West micro markets will be the beneficiaries of the metro line 2. West micro market will benefit from the metro line 3; however, work on the same has not yet commenced. Considering the current progress of other projects, ICRA does not foresee any near to medium term benefits for the residential real estate sector.

Comparatively, the commercial real estate in Pune has a stable outlook. The demand in the city for commercial office space has historically outpaced the supply. Resultantly, the vacancy levels have come down gradually. The demand is expected to continue in the near to medium term considering cost arbitrage offered by the city as well as adequate availability of skilled manpower and social infrastructure. As additional supply is also expected to enter the market, the vacancy levels are expected to be stable at ~4-6% over the next few years.