A turnaround in fortunes for real estate is only a question of time. What explains this optimism is rising transparency and discipline in property dealings.
It’s quite tempting to wonder if mutual funds or stocks can beat real estate in the long run, given the latter’s score card over the past few years.
In fact, this has left the stakeholders scratching their heads -- financial planners, property owners, investors and prospective buyers alike. That’s mostly because residential properties have failed to size up, with returns not matching the golden era of early 2000s.
Looking at 2013-18, residential property price appreciation in India bottomed out to a mere 12 percent – which effectively worked out to a little over 2 percent annually, even for properties at prime locations.
Imagine someone buying and selling such a property during this window. Their returns were not up to the mark. After all, the average 5-year return for housing across top 7 Indian cities was over 60 percent during the boom years of 2004-08.
If you look at the unorganised real estate, things look grim -- the drop is nearly 40 percent during 2009-12.
Goodbye, real estate investors? Not quite.
Slowdown – Geography plays a role
The sheer size and composition of India make realty a unique case study. Hyderabad, for instance, saw exponential rise in land price during 2004-08, which translated into an over cent-per-cent growth in major localities.
Similarly, Pune saw a significant IT boom during 2009-13, as a result of which land prices appreciated by as much as 60 percent.
What gives? Primarily, it’s the prevalent supportive policies that made the state reap rich dividends.
There are some parts of India that performed extraordinarily well while others didn’t. Simply put, the country is too big to generalise when it came to returns.
The 5-year return trend for Indian residential real estate is a pointer that the previous haphazard growth gradually made way for more realistic and mature market behaviour. Some markets are almost end user-driven, which puts the lid on speculative price hikes. Others are oriented more towards investors with a long-term view.
Changing market dynamics and acceptance of such change happened in pockets. Irrespective of geography and the quantum of investment, investors came to terms with this reality. Just like in the stock market, long-term players who see the big picture have responded differently compared to short-term speculators who can only appreciate a quick price rise.
Real Estate Versus Stocks
It may be noted that stocks and mutual funds despite in-built volatility strike a chord with the conservative Indian retail investor. However, ANAROCK’s recent consumer sentiment survey for H1 2019 suggested that while 25 percent respondents went with stocks and MFs, a majority of more than 57 percent cast their lot with real estate, which even put less risky fixed deposits and safe haven gold in shade.
So, it’s premature to write off real estate as Indians’ inherent love for properties has not collapsed. And investors have evolved in their outlook, now more mindful of alternative options in the residential space itself. The more well-heeled are undoubtedly bullish about Grade A commercial properties at prime locations. The number of investors who can afford such financial exposure is worth noting as the annual per capita income stood at $1,670 in 2016.
New Residential Money-spinners
Helped by government incentives, affordable housing can give returns to the tune of 8-10 percent in the long term. There are also a number of alternative residential real estate investment options, including serviced apartments, senior living, Smart City-based housing, and co-living. Monthly rental ROI (return on investment) for these residential sub-categories is a lot higher than the mainstay mid-income or luxury housing. So, much depends on how much an investor knows about the rapidly-changing Indian housing market.
For instance, co-living units can fetch as much as 8-11 percent ROI – a much higher yield than the current average of 1-3 percent in garden-variety residential properties. There are profitable asset classes in residential real estate, but few investors are actually scouring the radar.
Commercial Real Estate A Bright Spot
In earlier years, most ‘retail’ (small-ticket) investors banked on residential properties. Today, wealthier investors are eyeing commercial ones and ‘sunshine’ sectors like warehousing. With REITs (Real Estate Investment Trusts) seeing the light of day, commercial real estate is keeping investors hooked.
The recent oversubscription of the Embassy-Blackstone REIT definitely sends out a clear signal to global as well as domestic investors – it’s a good time to grab a piece of the Indian office property pie. In fact, we expect REIT investors to become more bullish and take stake in multiple Indian commercial assets that may get listed under REITs in future.
Under such a framework, small-time investors rightfully sense the unveiling of a major new investment avenue comparable to that available in more developed nations. Meanwhile, Indian commercial properties are generating a lot of interest among wealthy investors. This segment has performed much better than housing over the past few years.
Housing sales across major Indian cities have been muted, especially after demonetisation (DeMo), implementation of the Real Estate (Regulation and Development) Act, 2016 (RERA) and the Goods & Services Tax (GST). Meanwhile, commercial office leasing ROI has gone up y-o-y.
Residential – Down, But Not Out
In the past, many investors made a killing in residential properties by timing the purchase and selling them off. Certainly, given the new regulatory environment and existing norms that prevent ‘flipping’, speculative short-term investment in the Indian housing sector no longer makes sense.
To realise 8-10 percent annual returns or more today, housing investors must have a horizon of at least 5-7 years. Meanwhile, they can earn rental income from an asset that has perennial inherent demand.
In developed countries with organised property markets, alternative residential real estate investments for the long term have earned returns on par with those of equity and MFs -- with far less volatility.
India is in a state of flux, with a premium on transparency, governance and discipline. You can expect better times ahead.
But for now, Indian housing prices will hardly see any shift. In coming days, the pent-up demand of more than 10 million units will hold sway and drive up rental and capital value of all barring the ill-chosen ones.
From urban to suburban, and from peri-urban to rural, the inherent demand for housing – and the potential return on investment – is beyond doubt.(The writer is Chairman, ANAROCK Property Consultants. Views expressed are personal.)Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.