Ashish Khandelia, Founder at Certus Capital and Earnnest.me, believes what started happening to equities about 25 years ago – the advent of mutual funds shifted personal equity exposures to professional managers – is starting to happen to real estate. In an interview with MintGenie, Khandelia said the financialisation of real estate is the most exciting trend to watch out for in real estate investing.
Edited excerpts:
The real estate market has been buzzing lately amid the stock market turmoil. What is your view of the current real estate investment market?
Indian real estate market, especially the residential segment, has performed strongly since the pre-pandemic lows and future prospects continue to be promising.
The calendar year 2022 (CY2022) was a record sales year in terms of volume and the prices have also increased.
This positive sentiment is not just seen in consumers but also investors, both global and domestic, who are betting big in this space.
According to CBRE, the broader real estate sector received nearly $7.8 billion in 2022, a 32 percent year-on-year (YoY) growth and with a close to 60 percent share of foreign investors.
These capital flows are likely to remain steady or even grow as investors look to diversify their investments amid recessionary fears in US and Europe.
Till recently, most of the investment opportunities were only for institutional investors and the only option for retail/HNI investors was to buy physical property.
However, this is changing and some institutional quality investment opportunities are now available to retail investors too.
What are the current opportunities for real estate investors?
Institutional investors are betting big on both real estate equity and credit investments.
With a robust on-ground performance of the residential segment but limited capital availability from banks/NBFCs post-ILFS debacle, foreign and domestic funds have invested heavily in real estate credit opportunities.
A few such investors include Bain Capital, Varde, Oaktree, HDFC Capital, PAG and Kotak.
As per our estimates, more than ₹20,000 crore have been invested since 2019 in such opportunities.
For retail investors, too, there are now better ways to participate in this sector versus owning a physical asset as it comes with a lot of administrative hassles, limited investment expertise, and high ticket size, which increases the concentration risk.
Today, there are multiple opportunities available to an investor to play the real estates theme, such as REITs, fractional investing and secured fixed-income investments.
Our highest conviction theme currently is to participate in the residential sectors’ robust recovery through secured credit investment, similar to the activity witnessed by institutional investors.
These investments offer significantly higher returns compared to traditional debt investments, are secured by physical assets such as real estate and are serviced through visible cash flows from the underlying projects.
Further, unlike buying real estate properties that require large allocations, secured credit investments can be started with a much smaller amount such as ₹10 lakh only, typically available through new-age tech platforms. However, investors must look through the credentials of the platform or the underlying team before investing.
We believe that smart money will continue to actively pursue this segment given the robust outlook of the sector and good diversification to the volatile equity markets.
The real estate sub-segments (affordable housing/luxury housing) are witnessing enhanced demand. What are the factors that are driving the growth in the market?
CY2022 was a landmark year for the residential sector, especially the luxury and premium segments, following a prolonged lull experienced by the sector between 2014 and 2020.
The primary drivers were high affordability (almost at a two-decade high), reasonable home loan rates, Covid-induced preference for home ownership, shift towards spacious homes and community living.
Further, several regulatory reforms (RERA, GST and IBC) between 2016 and 2020 have significantly improved the transparency and discipline of the sector, resulting in improved consumer confidence.
We believe that these factors are leading the residential sector into a multi-year upcycle.
Who should look at the real estate market for investments? Can short-term investors also gain from real estate investing?
Real estate is an important asset class and should be allocated in all investment portfolios.
Especially, the vantage from residential credit is very strong, as is also evidenced by strong institutional interest from both global and domestic investors.
However, most real estate investments do require an investment horizon of at least three years or above, though many of these like rented assets and secured credit investments provide regular income on a monthly or quarterly basis.
What are some interesting emerging trends and factors which will shape real estate investment in future?
In our opinion, the financialisation of real estate is the most exciting trend to watch out for in real estate investing.
We believe that what started happening to equities about 25 years ago (the advent of mutual funds shifted personal equity exposures to professional managers) is starting to happen to real estate and regulations and technology are playing a big role in this transformation.
Robust digital and payments infrastructure coupled with acceptance of online investing is super-charging this transformation. Financialisation in the West has redefined real estate investing.
India needs similar modern-day platforms that combine investment expertise with digital convenience and transparency, to allow participation in real estate assets without the hassle of managing physical assets.
Such platforms, provided they are managed by experienced teams, can play a pivotal role both for the sector and investors seeking superior risk-adjusted returns.
Disclaimer: The views and recommendations given in this article are those of the expert. These do not represent the views of MintGenie.
