Chikara’s Mehra and Draycott: India’s housing market returns to solid foundations

Why we are less than halfway through a decadal upturn for Indian residential property

Andrew Draycott and Abhinav Mehra
Andrew Draycott and Abhinav Mehra


By Abhinav Mehra and Andy Draycott, co-managers of the Chikara Indian Subcontinent Fund

Property stocks may not be at the top of many investors’ buy-lists right now.

The dramatic rise in mortgage rates and elevated house prices are almost certain to have a negative impact on the property market in many Western nations.

But the situation could hardly be more different in India, where the property sector is in the early stages of a recovery after what was effectively a lost decade (2011-2021). As wealth and domestic consumption continue to advance in the country, we believe the nation’s property sector could be a significant outperformer.

Major reform

As is now the case in many western nations, India’s property market was in something of a bind until quite recently. Macro influences aside, the major factor determining the change of circumstances for the sector has been the property developers themselves.

It was a complicated situation, but in short, these firms established a reputation for a lack of transparency and accountability, delayed project completions and unfair practices.

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In the wake of the global financial crisis and leading into the taper tantrum of 2013 (when RBI hiked rates aggressively), developers were faced with higher financing costs along with a rising cost of construction.

The subsequent slowdown in the property market did not go unnoticed by the Modi government. So, to address the situation – and the inevitable barrier it presented to India’s economic growth – it introduced the Real Estate Regulatory Authority (RERA) act in 2016.

The legislation sought to bring greater transparency, accountability, and consumer protection to India’s real estate sector.

The transition to RERA along with the implementation of the bankruptcy code of 2016, was a gradual and painful process, however the reforms are now bearing fruit.

Underperforming property developers were effectively ‘weeded out’ over the following three or four years as they either went bankrupt or failed to meet RERA’s requirements. In fact, the total number of developers in the major cities halved.

Just as residential property sales began to show signs of a turnaround in 2019, Covid hit in 2020, leading to new housing developments hitting a wall.

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That has now passed and today, we are in year three of what is likely to be a decadal upturn in residential property. With trust in the property sector being re-established, per capita GDP slated to rise three times over by 2032 and falling inflation since its peak in 2022, the stage looks set for the sector to move from period of recovery to a boom.

House prices in India are still near their most affordable level for two decades and are finally starting to increase. Across the top seven cities, they rose by an impressive average of 10.2% year-on-year in the first quarter of 2023 – the highest growth rate since the last quarter of 2012.

What’s most exciting for us, however, is the amount of potential upside still on offer. India’s mortgage to GDP ratio hovers at a mere 11%, and that compares favourably to 20-30% in many East Asian economies and 68% in the UK.  As GDP per capita accelerates and access to credit continues improving with the rapidly digitising economy, mortgage penetration should rise rapidly and can continue for many years to come.

Picking the winners

There are various ways for investors to get exposure to India’s property cycle upswing still in its infancy. However, post RERA, we believe the best opportunity of all exists in today’s slimmed down universe of publicly listed property development stocks and leading high quality mortgage providers/private sector banks.

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An example of this is Godrej Property. Godrej has emerged from India’s property developer crunch as a trusted sector leader thanks to its quality management, trusted brand and reliable execution.

This is illustrated in its market share going from 2% in 2016 to 8% in 2022 amidst a backdrop of adversarial market conditions over the six years.  The company delivered its highest ever annual sales (up 56% YoY), net operating cashflow (up 101% YoY), and annual collection (up 40% YoY) in its 2023 results.

First-mover advantage

Given the length of the previous downturn in the property cycle, along with a backdrop of increasing nationwide wealth, we expect conditions in India’s housing market to remain strong for at least the next few years.

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