Since 2015, the mix of investments from fresh annual household savings has reversed in the favour of financial assets
Of the Rs 300 lakh crore (or 300 trillion-tn) of investments that Indian individuals have, about Rs 170 lakh crore is in financial assets – stocks, mutual funds, fixed deposits, bank savings. And 130 lakh crore is in physical assets, of which the main constituents are gold at Rs 65 lakh crore and real estate at Rs 55 lakh crore. The above investments have accumulated over the years, from Indian household savings being channelled into financial and physical assets. Of these new savings, in the period 2009-2014, about 60-62 percent went into physical assets and 38-40 percent into financial assets. This was the period following the Great Market Crash of 2008 when confidence in financial assets had fallen. This also coincided with the second half of the “bull run cycle” in Real Estate.
However, since 2015, the mix of investments from fresh annual household savings has reversed in the favour of financial assets and in FY 2017 (Apr 2016-Mar 2017), more savings went into financial assets than physical assets.
As far as the sale of new apartments in the top nine cities of India are concerned, PropTiger DataLabs reports have shown that sales have fallen from 460,000 units in FY14 to 310,000 in FY15 to 210,000 in FY16 and staying flat at the same number in FY17. The 200,000-odd apartments being sold in the past two years have supposedly been bought purely by end-users, thereby indicating that this is the core minimum demand for houses to live in. Hence, about 2.6-3 lakh apartments being sold each year earlier were being bought by investors, who have vanished in recent times. Investors stopped investing in real estate because purchase by end-users had slowed down. This, in turn, had slowed down as consumers had lost confidence, with projects getting delayed, mismatch of promise versus delivery and increasing demand for cash in transactions.
So, what has changed now? Should you invest in residential real estate now? Will this investment be able to compete with the returns in financial markets?
Well, a short answer to the above is that things have indeed changed! And that too, only in the last 8-10 months. There have been four main factors, which have led to this turnaround in the situation.
The first one was the demonetisation of currency notes of Rs 500 and Rs 1000 in November 2016. This nation-building move gave a body blow to market participants dealing in cash and cleaned up the resale real estate market of cash transactions. New apartment sale was anyways moving to a “full white” situation over some years. This has given relief to the home buyers who do not have to worry about arranging for large amounts of cash. This measure itself will bring back lots of investors who earn in white and want to invest in white.
The second factor was the implementation of the Real Estate Regulation and Development Act (RERA) across most of the states and union territories of India from July 31, 2017. This has given a huge source of comfort to home-buyers. The entire malaise of false promises, project delays, one-sided clauses - all in turn leading to uncertainty of the fate of the investment, will slowly disappear as home-buyers are protected from all these from July 31, 2017. Developers will have to pay interest of around 10% for project delays on the amounts paid by the buyers. All under-construction projects are covered under RERA, and the new Builder-Buyer agreements have multiple protective clauses for the buyers.
Implementation of GST from July 1, 2017, has again led to some simplification of taxation structure in the real estate. Developers are largely going to be benefited from credit on inputs used for construction. And the savings will get passed onto the buyers.
The fourth and the biggest factor contributing to the optimism for this sector is that prices in all major markets remained stagnant for the past 3-4 years. Hence, if you deduct annual inflation, real prices have actually fallen by 4-5% per annum in this period. This has brought the erstwhile runaway prices of homes under check. As salaries have increased by 8-10% each year, homes have never been more affordable than what they are today. Aiding this is another sub-factor of the cheapest home loans being available in almost a decade.
Viewed collectively, the above four factors are in the process of cleaning out the real estate sector in India. Foreign funds are waiting in the wings for investing into this sector. Any moment, they should start investing into good developers and good projects. Give a few quarters and the excess supply will also start liquidating since launches have reduced in the past quarter. That will be the time when the price trend reverses and prices start increasing. Real estate will again become a normal investment asset class with returns coming from a combination of capital appreciation and rental returns. Even if numerical returns from real estate may not match those of financial assets for 1-2 years more, the assurance of having a physical asset in hand is much higher than the intangible nature of financial investments. Also, if one gives the invested apartment for rent, there is a feeling of having helped a family in getting a shelter above their heads.
Hence, Mr. Investor, look out for the first signs of a trend reversal. The proverbial green shoots of revival are around the corner. Get in before the prices start shooting up again.The writer is Group Chief Strategy Officer, Housing.com, PropTiger.com and Makaan.com.