The wealth of Indian households (about 77%) is mainly held in the form of real estate according to data from the Reserve Bank of India. And this asset has not been appreciated for nearly a decade. Given the cyclical nature of the property market – which has not been the case in India, where prices have only risen – there have been attempts to call the bottom and predict a recovery. These were unsuccessful for a variety of reasons, including the long pandemic. Will this year be different? And what are the macro market trends that buyers – whether end-users or investors – can keep in mind when looking for new opportunities that may pay off when the going gets tough? will eventually recover?
Rental, especially in the residential segment, has not been an exciting topic in the past. Indeed, the real estate market has been a pure game of capital appreciation and rental returns have been paltry – never matching the interest one can earn on term deposits. With rising property prices, rental yields have not been able to catch up and have remained at 2-3% in most markets, even in the absence of price appreciation. Landlords have also found renting a home to be a problem, as there aren’t many property management companies to cater to tenants’ needs. Landlords’ legal rights are also not very strong, and breach of terms by tenants is not easy to deal with. So buy-to-let was not a popular option. For a tenant, the calculations of whether to rent a home or own it have consistently shown that renting is a better option, especially in recent years when prices have stagnated at best. But a few market trends – somewhat confused by the pandemic which has reset rents even lower – point to a likely shift in the rent vs. own dynamic.
Rents are likely to increase for several reasons. First, owners will demand a better return as price appreciation has moderated. Second, legal frameworks such as the Model Tenancy Act will make it easier for big players to enter the fragmented residential rental market. Third, trends such as co-housing will help unlock more property value and drive up rent, which will also help drive real estate demand for builders. Fourth, rental demand is likely to increase as many potential buyers may put off their purchase decision – due to caution about their financial stability, coupled with a lack of urgency to buy in a slow real estate market.
A property – similar to physical gold – was considered both something that had an end use, but also a store of wealth. But with the financialization of assets, this is changing and pure investors are moving away from end-user-friendly properties towards more efficient options.
For example, rather than buying apartments under construction at a low price – which in turn pays the builder’s cost of construction – they can opt for real estate private equity funds which are alternative investment funds (AIFs) who finance the promoters. Likewise, owning property as a long-term investment to keep up with inflation can best be achieved through real estate investment trusts (REITs). There are also condominium options that only require smaller investments, but still provide a more diverse portfolio of different property types and locations.
Thus, the market could see less speculation in physical assets – due to the high cost and availability of other options – and more end-user driven demand. This should support steady long-term growth once current imbalances bottom out in the near term.
Rather than building generic homes, builders are looking to specific themes and demographics. For example, retirement homes have been on a growing trend over the past few years and have seen good demand and rising prices even as the broader market faced headwinds. Similarly, student living spaces are another topic that arouses interest.
There are also mixed-use developments – where residential, commercial and office space – are found in the same complex. These autonomous communities also see interest. These specialty projects usually help a developer stand out and create a unique selling proposition (USP) and demand a premium. As consumers evolve, there may be a demand for more nuanced built spaces and these new themes may provide opportunities for good returns.
Even with a sober outlook, non-residential Indians invested $13.3 billion in India’s real estate market in FY21, down from $12.5 billion in FY20, according to 360 real estate agents . But it may be a trend that could be reversed, at least in the physical asset segment, due to a few factors. First, various travel restrictions due to the pandemic have made it difficult for NRIs to manage or sell their property, forcing them to rethink physical property issues. Second, property returns have not been exceptional and many may still be hesitant to call the bottom, especially when there are other investment options such as stocks. Third, even if real estate returns are good in INR terms, they may not see the full benefits in foreign currency – with the outlook for global interest rates, the gains are likely to be eroded by the depreciation of the currency.
There may be changes in the future, with implications for certain property types and geographies that get a higher share of NRI investments.
The author is an independent financial consultant
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January 13, 2022