Real Estate Investing During a Downturn – Indiassetz
Real estate is one of the most preferred investment avenues for Indians, forming a sizeable part of their investment portfolios. However, the recent and ongoing economic slowdown has weighed down on buyer sentiments heavily, affecting real estate sales and investments. Investors are wary of making big-ticket investments in an uncertain market, with many adopting a wait-and-watch approach to real estate investment. However, despite the bleak outlook, the Indian real estate market still presents viable and attractive opportunities when investing for returns vs. investing for personal use.
While current, near and medium-term scenarios do not appear to support speculation, long-term real estate investments hold potential to deliver favorable returns. Factoring in the cyclical nature of the real estate market, the current slump is expected to segue into an upturn, given the right impetus; a likely outcome given the real estate industry is a key contributor to overall economic growth and governmental interest and measures to revive and strengthen the real estate sector is evident through structural reforms and financial support and funding.
Increasing instances of delays in completion of projects and insolvency of developers in recent times may have eroded consumer confidence. However, over-supply and large inventories also mean availability of ready-to-occupy/completed properties in varying price ranges. In a bid to push sales and offload inventory, many developers tend to offer attractive incentives and price discounts serving to lower investment costs. In a buyer’s market, as in the current scenario, employing the assistance of marquee property advisors with the necessary market knowledge and professional negotiation skills is a proven way for investors to achieve favorable price points.
Even as borrowers feel the pinch of higher LTV (Loan-to-value) ratios, and failing shadow-financing options, prevailing interest rates on home loans, having fallen to record lows, make financing real estate investments more affordable. Top lenders such as HDFC, SBI, ICICI Bank, Axis Bank, Syndicate Bank etc. all offer low-interest home loans with rates starting at 7.85%. Banks passing on the benefit of rate cuts by the RBI over the years to home buyers favors leveraging investments. Also, with interest rates now pegged to repo rates borrowers stand to benefit from future rate cuts on an immediate basis.
Tier 2 and Tier 3 regions present opportunities for attractive returns on investments with property prices registering higher growth than in cities and metros. Infrastructural development, connectivity improvement and growing economic opportunities underlies the rising demand for residential properties in non-metro and micro-markets. There is also a clear push for supply of and demand for affordable housing in India, another growing segment that presents affordable investment opportunities and favorable returns potential, pegged by experts to be in the range of 8% – 10%.
Non-conventional forms of residential property such a co-living spaces, service apartments etc. are also forecasted to yield returns in the range of 8%-11%. Not an oft considered option, commercial real estate is touted to be an attractive segment, especially for large-ticket investments. Improved rental yields make investment in this segment comparable and favorable to other popular investment avenues viz. equity and debt markets, both currently stressed in a slowing economy. A new and emerging option in the commercial real estate segment are REITs (Real Estate Investment Trusts). REITs, akin to mutual funds, provide investors the advantage of improved liquidity and easier management of real estate investments as well as being a viable alternative to investing in physical assets. The first listed REIT in India was launched in March 2019 by the Blackstone-backed Embassy Group with a successful debut. Although, still very new, REITs have evinced interest from a number of leading developers in the real estate market and are expected to deliver attractive long-term returns.
While investing in real estate for the long-term is advisable at the current juncture, locking in funds for a long-period of time in an illiquid option such as real estate should be done with due diligence and careful assessment of associated risks. This makes identifying the right property developers key to investing during a sectoral downturn. Investors should be wary of key factors such as developers’ reputation, track record on project completion, financial standing and funding plans. RERA registered properties have the advantage of transparency in dealings with developers who are liable for non-adherence to provisions under the Act. Investors should also be wary of the effects of an economic downturn on personal finances. The effect of slowing business growth and employment instability on personal incomes and cash inflows is imperative to note in relation to an investors ability to fund investments as well as to stay locked in for a considerable period of time given the illiquid nature of real estate investments.