ITS LOCK ON for Indian Real Estate

LOCK – ON means 'Disambiguation' which refers to the removal of ambiguity by making something clear.

We never would’ve imagined a day when 1/3^rd of world’s population would be in a lockdown. While the wrath of the lockdown has totally changed our lives, putting our work and finances in a jeopardy, our future will depend largely on how we utilize the time available today. The lockdown gives us ample of time to ponder upon key decisions taken and to be taken, explore avenues for reviving the finances, make mindful investments and rectify the unpreparedness with which we are facing today’s situation. Make a choice now, whether you want to repent over what went wrong or make lemonade out of the lemons life (or the virus) has thrown upon us. If you choose the latter, then this article is for you to read ahead.

This pandemic has rightly taught us that uncertainties come unexpectedly. How prepared are we to face an adverse situation again?

Businesses are adversely hit and job security has gone for a toss, leaving us in a catch 20 situation. Talking about investments, the FDs, Stocks, shares that we invested in are witnessing negative returns. Our priced possessions like jewelry and gold are locked up in banks and not helping us get through the situation. Fancy cars are stationed in parking lots, unused. The alternate investment options like SIPs, Mutual Funds too aren’t performing.

Remarkably, one thing that has stood between us and the disaster is HOME. A sense of safety and security that a home brings for a family is irreplaceable. It is a physical as well as an emotional comfort zone where one heals and recuperates through tough times. Man, right from the stone age has been wandering in search of a home (caves), to protect himself, establish a family, dwell in and flourish.

A critical question arising out of the Covid19 scenario is what will be the fate of home buying and Real Estate post the lockdown?

Studies and reports suggest that the real estate sector will decline; witnessing the worst hit till date and survival will be a challenge. However, as said by Benjamin Franklin, “Out of Adversity comes Opportunity”. The sector also flashes rays of positivity and you would be intrigued to know about the potential to INVEST in Real Estate, against all the current odds.

Real Estate will be the most reliable investment option, considering the conditions of banks, share market crash and capital depreciation or any other option that may appear to be safe initially.

Why will the Indian Real Estate sector grow faster than that of the world?

1.      The world economy will go into recession this year with a predicted loss of trillions of dollars of global income due to the coronavirus pandemic, spelling serious trouble for developing countries, with the likely exception of India and China, according to a latest UN trade report.

2.      The virus pushes U.S.-Chinese relationship towards fracture; the fallout from the global pandemic threatens the recent U.S.-Chinese trade deal and could undermine future global stability. This rift will lead India to gain interests of global investors and companies. These investments open doors for better infrastructure, leading to the opening of multiple employment opportunities. These factors directly balm the upward movement of real estate in India.

3.      China lost its goodwill and trust from investors and the corporate world, owing to the
(rumored) conspiracies in the way the country handled the spread of COVID 19 to the world. After China, India is the only country with the capacity to handle the magnitude of the Global scale, in terms of manpower, resources, transport systems, etc.

4.      India so far, has augmented trust in handling corona and has bravely fought pandemics in the past too. Indian Real Estate gains appreciation form world economists for its perception as a Nation full of values and ethics, leading India with great avenues to become a Global Superpower.

5.      NRI investment in real estate is bound to improve amidst Rupee fall.

While the above conditions make India a lucrative hotspot of real estate investments, below are few points to consider towards real estate buying:

Emotional Investment: In India, owning a home is a matter of pride and esteem. The sentiment runs around passing the home possession as a heritage from parents to the future generations. Interestingly, after our first name, ‘Home’ is second most used Word in the world every day. Ultimately, whatever be the circumstances people across the World will not stop investing in a home or buying real estate.

Statistics: The Indian Real estate growth trajectory, since the past few years was likely to emerge stronger and is projected to be USD 650 Bn by 2025 and USD 1,000 Bn by 2030. Residential, commercial and Retail are the three key asset classes, which have primarily been contributing to the sector’s growth. Real estate contributed nearly 6% to India’s GDP in 2017. As per the projected growth trends, the sector’s contribution is likely to rise to 13% of India’s GDP by 2025.

·         Real Estate – Largest Employment Generator: After agriculture, Real estate is the largest employment generator in the country, creating tremendous opportunities for the skilled and unskilled workforce. India’s Real Estate employee base is estimated to be 67 Mn by 2022.

·         High Tangible Asset Value: Real estate is not paper money, this is the asset you can hold tangibly which again increases its reliability and return on investment.

·         Competitive Risk- Adjustment Returns : Based on July 2018 data from National Council of Real Estate Investment Fiduciaries (NCREIF), private market Commercial Real Estate returned an average of 9.85% over the past five years. This credible performance was achieved, together with low volatility relative to equities and bonds, for highly competitive risk-adjustment returns.

·         Attractive and Stable Income Return (Specially in Commercial space): The rental yield from real estate is much higher than returns on any traditional sources of investment. Commercial investment can yield upto 12% ROI and lowest to 5% ROI (with capital appreciation) depending upon the construction stage and lease terms of the property.

·         Inflation Hedging: The inflation hedging capability of real estate stems from the positive relationship between GDP growth and demand for real estate. As economies expand, the demand for real estate derives rents higher and this, in turn, translates into higher capital values.

·         Long Term “Assured” Wealth Building Asset with “Predictable “ Returns and least Risk :- Real Estate helps you build wealth in long term due to dual advantage of Regular “Predictable” Returns (yield is higher than Dividend Returns) and an “Assured” Capital Appreciation in long term, don’t be scared of Corporate Scams, while they can affect the company’s stock price or your bank’s health, but it cannot junk out the value of real estate you own

·         “Helps you Raise Money Quickly” - Hard Asset is the most preferred collateral for a Bank, to raise capital through a loan (LAP/LRD) your property is the best asset you could own!

·         The Ever Rising FSI Benefit - “Wine and Real Estate improve with Age” - While as per accounting standards real estate is not a depreciating asset, in practical life too an older development can reap benefits of redevelopment wherein due to ever increasing FSI norms of MMR the incoming developer would not only offer rent for transit accommodation and corpus as hardship allowance, but also offer at least 25% to 30% enhanced Area (which is of great value as remember, 1 sq.ft of Real Estate in Central Mumbai is valued more than 10 gram of gold) !!

·         Work from Home Culture: We are in the middle of the largest test of home-working in history and corporates are adopting, refining and testing policies, processes and infrastructure to make it work. We expect quarantine protocols to encourage work-from-home initiatives and for these practices to be adopted in new geographies as the contagion spreads. Large multinationals who recently, and publicly, announced the scaling back of home-working practices now indicate a desire to embrace widespread use of this practice until the outbreak passes. So commercial demands and co-working space or bigger house may increase.

·         Student Housing: An unusual market development that is gradually emerging is student housing in India. Real estate consultancy firm, Anarock Property Consultants says that of the 37 million students pursuing higher education in India, more than 75% live away from home. Existing hostel facilities can accommodate only 18%-20% of this migrant student population. Developers in Mumbai & Pune have already ventured into this space that offers 7% returns.

·         Co-living market size across India’s top 30 cities is expected to grow more than double by 2025 to $13.92 billion from current $ 6.67 billion. The demand for co-living in terms of beds is slated to grow to 5.7 million from 4.19 million, while the share of private beds is likely to rise from 15% to 30% of total demand in the co-living segment, showed a Cushman & Wakefield India report.

·         REITs are a great investment avenue not only for institutional investors but also for retail investors, who find it difficult to invest in the commercial real estate, which has a better rent yielding than residential properties. Unlike other equity investments, REITs provide assured returns to the investors through a compulsory dividend distribution policy. REITs are mandated to distribute 90% of their net distributable income as dividend. There is also a further upside potential for the investors from periodic property valuations. India's first listed REIT, has gained 50% since listing in March 2019 as against a 10% gain in the Nifty Realty Index and 5% return of the benchmark Nifty 50.

·         India’s improved rank on Ease of Doing Business and the courage to implement reforms such as DeMo, RERA, and IBC are indeed creditworthy. These are expected to yield fruitful results in the future and help establish Indian real estate as a preferred destination for global investors, occupiers, and homebuyers.

WHY REAL ESTATE DURING LOCKDOWN?

Probably most of the people interested in buying real estate would be holding their decision till the lock down opens due to speculations in the market or risk pertaining to economic conditions. Yet for any clever investor who is observing the current market will testify buying of real estate during lock down to be the smartest move. Here is why –

1.      Reduction in Home loan rates: On 27 March 2020, the Reserve Bank of India (RBI) reduced the repo rate by 75 basis points (bps). The reduction saw the repo rate reduce from 5.15% to 4.40%. New home loan rates start at 8% from 1 March 2020. So indeed this is good time to buy your home if the decision was just hiding behind the corner for some better rates or good units.

2.      Low Demand – Value for Money: Real estate is facing deficit demand in the market which leads to generation of various attractive offers by Developers. To maintain the good books, builders are currently offering very low rates, lucrative payment plans and additional offers resulting in lowering the cost of property. End-user can expect to buy a property as low as the launch price during this lock down.

3.      Reduction in Stamp Duty: The Maharashtra government on March 6 announced that it is reducing stamp duty on properties by 1% for Mumbai, MMRDA Region and Pune for a period of two years.

4.      Passive Income: Various small investment options are being introduced in the market starting as low as 5 lacs in real estate that too with a rental income. This is again an opportunity to create a separate asset class in your portfolio and start a source of passive income.

5.      Demand- Supply breakthrough: Due to low demand, discounted rates on good inventories are available. But once the economic condition will start settling, the bargain will reduce and demand will also start floating upwards. The rates will not be as low as they are now during lock down.

6.      Segment Shift :  Earlier Lower middle class people used to buy 10 to 12 Lakh property. Now middle class will buy those as an investor and rent it out to lower middle income group. Similarly shift will take place on affordable segment likewise. Middle income group will emerge  as new investor community.

7.      Strike the Iron when it is Hot: We all must have heard this at least once. But it’s time to implement the strategy to gain extensive returns on the investment. Not only the rates are strikingly low, the return on investment that are being offered by some Developers is as high as 15-18%.

Final Thoughts: 

Your Money is SAFE IN Indian Real Estate

-          Regulator like MahaRERA leading the cause of timely justice,

-          High Court Judiciary being extremely proactive and pro-consumer / investor,

-          NCLT giving prompt hearings and orders favoring customer and financial institution and lastly

-          The Supreme Court judgment re-affirms the rights of the homebuyers as financial creditors under the bankruptcy code....

Simply put, it means that homebuyers share equal rights of recovery in the developer's assets which are liquidated as part of the bankruptcy process

The Bottom Line

Real Estate cannot be lost or stolen, nor can it be carried away, purchased with common sense, paid in full, and managed with reasonable care , IT IS ABOUT THE SAFEST INVESTMENT IN THE WORLD.

Real estate is a distinct asset class that is simple to understand and can enhance the risk and return profile of an investor’s portfolio. On its own, real estate offers competitive risk-adjusted returns, with less principal-agent conflict and attractive income streams. Though ill-liquidity can be a concern for some investors, there are ways to gain exposure to real estate yet reduce ill-liquidity and even bring it on-par with that of traditional asset classes. Real Estate investing even on a small scale, remains a tried and true means of building an individual’s cash flow and wealth.

“BUY Real Estate in areas where the Path EXISTS , AND Buy MORE Real Estate where there is no PATH, but YOU can Create Your OWN. Don’t WAIT to BUY Real Estate , BUY Real Estate and WAIT.

Thoughts Compiled By :

Dheeraj Kochhar

Capitor Ventures Pvt Ltd

Navi Mumbai