Real estate, as an asset class, is distinctly different from other asset classes because of its deep emotional connection with the Indian psyche, its nature of ‘can be touched and felt’ and for being easy to understand. In fact, it is also an asset class wherein a person’s financial stability is measured on the basis of the quantum of investment he or she has made in real estate.
Buying a house in India is a huge psychological and emotional decision for most middle-income group people and the highest priority is accorded to the repayment of housing loan as it is linked directly to a person’s status symbol. This behaviour is the same across income levels in India. In fact, as income increases, buyers start preferring weekend homes, holiday homes, luxury homes, among others. Also, historically this asset class has mostly generated high returns in its every form, i.e., residential, commercial or land and hence, it has become a preferred investing vehicle.
But this decision of a buyer is often influenced by family, friends, and social circles as it is the most easily available source of information, which might be biased towards a particular location due to proximity to social circle or growing up in a particular area. For many, the decision is based upon infrastructure announcements in far-flung peripheral areas.
People also get lured by discounts or deferred payment schemes promising amenities or marketing gimmicks of developers of guaranteed returns. In order to promote their offers, some builders offer additional gold coins, vehicles, free modular kitchens, among other things. Thus in India, while a host of factors render this decision to be made with more heart than head, it should ideally be the other way round to check whether it is for investment or self consumption. Even if the house is purchased for residing, there is always an aspiration to upgrade to a bigger house or a better locality and hence, buyers keep track of prices of existing homes as well.
Unlike other asset classes, real estate is an illiquid asset class. Also, as this sector is relatively less regulated unlike insurance or equity markets, investment has to be a cautious and well-calculated. Buyers or investors must take a holistic approach by considering factors such as location, existing and upcoming physical and social infrastructure, and prospects of the property.
To take a decision, it is very crucial to do adequate research on the locality, prices of under-construction properties, resale values of ready projects, execution record of builders in terms of timely completion, quality of construction and the type of neighbours residing in the project and vicinity. Buyer should also evaluate if the project is an end-user driven location, i.e, social infrastructure is well established and people are residing.
It is must for investors to go for physical site visits during the day and night to do a thorough recce. Only consider investments in properties where construction is going on in full swing or is at an advance stage, if not ready to move in.
To access more relevant information regarding its re-saleability, one should take professional help of property consultants or banks who are lending to the projects and specific buyers of that project. It is also imperative to have a clear understanding of financial implications before buying the property in terms of hidden costs, which are charged over and above the price quoted by the developer.
As an investor or a buyer, time has come to evaluate what returns to expect especially in the current scenario. As rental yields in India across cities are as low as 2-3%, it is the capital appreciation which makes real estate an attractive asset class. In other words, rental yields are negligible to make an impact on the investor’s decision.
Assume you purchase a house worth Rs.100. It is split into Rs.20 of your lifelong savings and Rs.80 of loan, which means an investor is already four times leveraged on his equity. The interest rate is 9% and property price appreciation is 10-12%. In such a scenario, leveraged returns can give you better returns, but if the property is going to appreciate lesser than the lending rate, the investor will suffer. Leveraged return is, thus, a good paradigm in a rising market but in an anemic market, leverage returns can wipe away your equity. So, expectation of returns and investment horizon is very critical.
The fate of real estate is dependent on three factors—interest rate, job creation and infrastructure development—which are directly linked to the economic cycle. Therefore, investors must be cognizant of the fact that it is an asset class for long-term investment. One should have an investment horizon of at least 5 years.
So, while the sector has given attractive returns in the past, in this operating environment of high interest rates and sluggish gross domestic product (GDP) growth, prices are likely to see a moderate growth. But, as inflation drops and the economy improves, returns will beat inflation.
As far as timing of an investment is concerned, it can definitely be made in the downturn. With prices being stagnant for the last 3 years, there has already been a correction in terms of time value. Affordability has improved to some extent. This, along with availability of attractive schemes and ample discounts make it an opportune time to invest in a downturn both for investment/self consumption. But buyers need to be extra cautious during a downturn and must go with developers with an excellent execution record.
Over the last few years, the historical gap between government price and market price has started shrinking and this is good news for all real estate stakeholders as it reflects the governance framework is getting developed. Also, the implementation of the Real Estate (Regulation and Development) Act, 2016 will bring in the transparency in the sector. As the policies are getting framed, this sector is getting more organised and the buyer is also evolving. One still needs to put the right focus on primary market research and as mentioned earlier, more mind than heart.
Source: Live Mint