With Diwali, there are certain pockets that are witnessing revival of consumer demand. On the other hand, there are sectors that continue to clock sales lower than pre-pandemic days.
In this, where does India's real estate sector stand? As this graphic shows, luxury housing rental market is up 18% in the past two years. But, is this enough to cause a revival in the housing market, in rental and sales, both?
In this conversation with, Ashish Khandelia, Founder of Certus Capital and Earnnest.me, MintGenie talks about Diwali and the real estate market as an investment horizon.
With the real estate segment witnessing a recovery in demand, is Diwali a good time to purchase realty?
Historically, festive season has always been an auspicious time to invest, especially in real estate. The residential real estate performance over the last 1.5 years has been strong despite recent interest rate hikes and calendar year 2022 is shaping up to be one of the best years for residential sales in almost a decade. There has been a moderate increase in property prices over the last year, but this is after prices remained practically flat in real terms between 2015 and 2021. Therefore, these were easily absorbed by the buyers, and we believe that despite the price increase and rate hikes, demand remains structural and the same will continue for the next few years. However, we do expect FY24 to be slower than FY23 due to potential slowdown in the west and as rates rise further by another 30 – 50 bps.
Just for investment purposes, what would you advise investors to buy this Diwali - residential realty, commercial, REITs or InvITs?
Earlier, the only way to invest in real estate was to buy it physically, whether it’s land or residential units or commercial premises. However, now that trend is changing and there are smarter to invest in real estate that not only makes it easier but also brings along professional expertise. These new-age options include REITs, fixed-return credit opportunities secured by real estate and fractional ownership.
For residential real estate, you buy it if you want to consume it. Else, one can look to participate through private credit with residential projects as the underlying collateral and this can give anywhere between 12%-15% secured return. For example, HDFC and Kotak, both recently raised over $2 billion for institutional investors to make such investments. Now, domestic investors can also participate in similar opportunities available through platforms such as Earnnest.me. Apart from these, investors may consider certain mutual fund schemes created by few reputed asset management companies that invest in sectors and companies linked to housing demand.
Commercial real estate is also turning the corner after COVID induced stress and REITs are the best way to participate in commercial real estate. In our view, a good price point to buy REIT is when on the trading price, the most recent dividend yield is in 6.0%-6.5% range.
If invested just in realty, how should an investor's portfolio look like?
In our opinion, the appropriate way to measure how real estate has performed from an investment perspective is to look at what it has done for institutional real estate investors. Over the last decade institutional investors have invested more than $50 billion in Indian real estate. These type of investments broadly fall in two categories (1) equity investments in commercial premises (offices, malls, warehouses) and (2) secured credit investments in residential real estate projects. Well-structured investments in both these categories have typically generated investment return of between approx. mid-teens to early 20s.
What are the key trends that are going to impact the sector going ahead?
The property market today is in a much better shape as compared to a decade ago. The sector is offering investors with better and more transparent opportunities across various asset classes within real estate.
There has been a lot of clean-up that has already happened whereby fringe players have left the space & the quality of players remaining is improving with every passing year. RERA has been a game changer which has brought about greater level of transparency, regulation and improved governance. As the sector is maturing, developers with demonstrated track-record and better supply discipline will emerge stronger. This consolidation is just the beginning and there is still a long way to go.
Increasing interest rates may slow down the demand in the interim period, but structurally property market demand is on an upswing. With more and more employees returning back to offices, there is incrementally more space which is leased out in the CRE space as well and we will soon get back to pre-covid levels.
Do you see rate hikes as a key risk to recovery in the realty space? What are some other key risks?
Interest rate hike that we saw in the last few monetary policies was inevitable seeing the spiralling inflation. Since India was in a low interest rate scenario, there wasn’t much heat that was faced by the industry. Maybe there is further room for absorption of additional ~ 50-75 bps from hereon. Home rates are now around 8.5% and may go up to ~9% by the end of this financial year. In our view consumers are absorbing these rate increases but if they start inching beyond 9%, it will certainly depress the sentiment.
Apart from this, demand slowdown globally will have an impact on export-oriented sectors including IT, automobiles etc. which in turn will affect real estate demand in the specific catchment area.
With demand rising, do you see builders rising prices?
Inflationary pressures & elevated commodity prices led the developers to increase the real estate prices by ~ 10-12% post the second wave of COVID-19. The pinch of interest rate hike was not felt as much by the consumers and the developers as India was enjoying a low interest rate scenario. With robust demand and increased rate hikes, it is inevitable that the prices will move northwards. However, the developers will have to strike a balance and be realistic about this price increase considering home loan rates.