Good time to invest IN REAL ESTATE
4 Jan 2014, Times of India, Times Property
Real estate has traditionally been one of the best-performing asset classes, with the potential to generate fabulous returns in the long term. However, in view of the current slowdown in the economy, a question playing on the mind of many buyers and investors today is this a good time to invest in property?
Although some industry experts advise a cautious approach in the current scenario, a majority of them still seem to be bullish on real estate and not without reason.
Brotin Banerjee, MD of Tata Housing, says: "Real estate has managed to give enormous returns compared to all the other asset classes over the last decade due to a huge gap in demand and supply. It has always been a long-term investment vehicle compared to other asset class. Although the sector has been going through a consolidation phase over the last few quarters due to economic slowdown and increase in property prices across major centres, the sector is expected to stabilize in the next two to three quarters once the economy is back on track."
"We expect this sector to grow, though at a slightly lower pace, as the demand for housing still appears to exceed supply, and the weakening rupee makes India an attractive real estate investment destination for non-resident Indians. Besides, investors and end users are sitting on the fence, waiting for an opportune time to book their dream home," Banerjee says.
"At the moment, when equity markets and bullion markets have started testing historical highs, the realty sector is going through a tough phase. The declining absorption rate and persistently mounting inventory are compelling developers to offer discounts and freebies. Thus, this is a good opportunity to strike lucrative deals in the realty market," says Samir Jasuja, founder and CEO of PropEquity, an online business intelligence platform catering to the realty sector.
Many investors and end users are currently sitting on the fence waiting for interest rates to drop. But experts say that while interest rates are currently high, one cannot be sure when will they soften and by how much.
Anil Jindal, chairman of SRS Group, says: "With the passage of time, new launches are only going to be more expensive, and hence there is not much to be gained by adopting a wait-and-watch approach. It is also imperative to realize that the cost of construction on account of the land acquisition cost, material, labour costs, etc, is only set to rise, more so in the face of India's ongoing dilemma of low growth and high inflation. Hence, it may not be wise to delay one's investment much as such times don't come again and again."
Industry experts say that it is an enduser market currently and price points in the premium as well as high and mid-end segments are expected to remain stable in the short to medium term. But the long-term outlook for the realty sector seems bright for a variety of reasons. For instance, currently there is a huge demand for quality residential development across the country and this demand not only outstrips supply by a large number, it is also likely to remain so until the next decade, as a large proportion of Indian population still does not own a house.
The data and research done by various institutions clearly point to the huge shortage of affordable homes in India. It is this shortage, as well as the need to own a home for the first-time buyers, which will continue to sustain the demand for the affordable-housing segment.
With a shortage of around 24.7 million units, and 70% of it in the affordable-housing space, experts see this growing at a healthy rate in the next three-five years. As far as luxury housing is concerned, the demand is likely to be driven by changing lifestyles and aspirations amongst young India.
"With rapid urbanization and influx of global lifestyle trends, a majority of affluent homebuyers are looking for homes to reflect their financial and social standing. On the whole, we see the sector expanding by 30% CAGR in the next decade and property prices to appreciate at a moderate rate of 10% per annum," Banerjee of Tata Housing says.
The key reasons responsible for the growth seen in the real estate sector in India include liberalization of government policies, growing young population, and rise in the nuclear family structure. Further, FDI in multi-brand retail is set to give a push to the growth in the sector. It will trigger the opportunities for retailers, thus leading to an increase in demand for real estate.
Besides, ancillary and service industries, like IT/ITeS, KPOs, and manufacturing industries-which are being set up in Tier 2 and Tier 3 cities-are also likely to play an important role in raising demand. Various studies also point towards appreciation in property prices in the long term. "Although, in the short term, residential real estate prices in different cities in India will either remain steady or see minor upward or downward fluctuations, in the long term they will rise again," a recent Jones Lang LaSalle India research report says.
This explains why even after one has satisfied all the basic investment criteriagood location, right size and configuration, right entry point, and right entry price-one needs to stay invested for the mid-to-long term in order to garner the best possible returns in real estate.
As a general yardstick, an investment horizon of four-five years is considered to be ideal. "Currently, if one has an investment horizon of four to five years, real estate is the best asset class to invest at the moment. With lots of inventory in primary as well as secondary market, the time is ideal to find a deal both from developer as well as in the resale market. Going by the thumb rule, buy at lows and sell at highs, one should utilize this opportunity to enter the realty market," Jasuja of PropEquity says.
But just investing in any property will not yield the desired result. "End users must exercise caution and do a thorough check of the profile and track record of the developer-they must also examine the project status and see if all clearances are in place or not. They should be extremely careful while investing, especially during the pre-launch phase," Jasuja says.
Gaurav Kumar, co-head (of capital markets) at CBRE South Asia, says: "It is advisable to look at projects under construction, which are likely to offer target returns in the range of 12-15% (depending on the particular market) per annum on capital appreciation for a three to four year period."
Industry experts say that there are two kinds of investments in real estate that deliver good returns. One is when you invest on the basis of the fundamentals of a project, and another when you invest when the property market is on an upswing. And also in a rare good scenario when both these factors are at play.
"When you invest on the basis of fundamental strengths, for instance, the decision can rarely be bad or ill-timed, simply because your investment is made after a diligent study that takes into account all the factors and variables at play. This includes the location of the project, regulatory directives on its usage, licences received and so on and so forth-all this leaves little room for nasty surprises later on," Anil Jindal of SRS Group says.
When a real estate investment is made based on market fundamentals, the chances of one's investments turning sour are less. "Yes, such an investment may or may not see a quick appreciation. If it appreciates quickly, it is a reinforcement of your decision and the market is rewarding you for that. However, if your investment is not showing a sharp upswing, remember that such swings are often associated with speculative buys and you surely are not in the speculations game. Be assured that if you have taken the right decision, appreciation will follow," Jindal says.
All said and done, however, what kind of returns can be expected from real estate? Samir Jasuja of PropEquity says that historical returns, as seen in residential real estate assets, have outperformed other asset classes. Typical historical annual returns from residential real estate have been in the range of 15-20%. This average corresponds to returns seen in the most active cities (in terms of organized real estate activity) of India. So, with informed decision and investment done after proper due diligence, residential real estate assets can still outperform many other asset classes, Jasuja says.
THE DECLINING ABSORPTION RATE AND PERSISTENTLY MOUNTING INVENTORY ARE COMPELLING DEVELOPERS TO OFFER DISCOUNTS AND FREEBIES. THUS, THIS IS A GOOD OPPORTUNITY TO STRIKE LUCRATIVE DEALS IN THE REALTY MARKET
WITH THE PASSAGE OF TIME, NEW LAUNCHES ARE ONLY GOING TO BE MORE EXPENSIVE, AND HENCE THERE IS NOT MUCH TO BE GAINED BY ADOPTING A WAITAND-WATCH APPROACH. IT IS ALSO IMPERATIVE TO REALIZE THAT THE COST OF CONSTRUCTION IS ONLY SET TO RISE ON ACCOUNT OF ENHANCED LAND ACQUISITION COST, AND RISE IN MATERIAL, LABOUR COSTS