Ashish Khandelia, Founder, Certus Capital and Earnnest.me says residential real estate has shown a very promising comeback post the lull period experienced during COVID-19 and the rising interest rate is unlikely to dampen the consumer sentiment. However, he says that the pace of growth may moderate as compared to a block-buster FY22 as the rising input cost is a major concern. In an interview with MintGenie, he says he believes that real estate investments can help tide over the current market volatility.
After two years of the pandemic, there is some pick-up in demand. Do you see this getting affected due to rising interest rates?
Residential real estate has shown a very promising comeback post the lull period experienced during COVID-19. There has been a structural change in housing demand induced by the pain experienced by many during the pandemic and it is well-established that today, home ownership remains a priority for many.
The rising interest rate is unlikely to dampen the consumer sentiment and we expect the same to remain buoyant. For instance, despite a 90bps hike, early results for Q1FY23 have showcased the continued momentum In sales.
Over the last 2 years, there has been a clear change in consumer perception and preferences. This coupled with rising income levels is unlikely to derail the momentum, although we may see the pace of growth moderating compared to a block-buster FY2022.
What are the key trends that will impact the real estate segment in the near term?
The real estate sector is going through a radical change, primarily driven by regulation, changing buyers' preferences and the use of technology:
RERA has brought out greater accountability in the developers and awareness amongst the buyers. From a consumer’s standpoint, we see a clear preference towards –
2. A shift towards spacious homes, community living, and performing developers
3. Timely completion of projects and emphasis on construction quality
The real estate industry has witnessed consolidation in the last few years and only those players who have shown strong resilience have sustained the headwinds faced by the segment over the last few years. Also, thanks to digital adoption, the home buying experience has improved materially. There is continuous engagement with the consumers through multiple channels such as e-brochures, online project walkthroughs, and drone images showing construction progress to name a few.
Apart from improving consumer engagement, technology is changing the way the sector will access capital in the coming years. There is a growing trend toward the financialization of real estate investments. REITs, fractional ownership and fixed-income investments (NCDs) secured by real-estate projects are a few such examples. This trend can significantly increase the investor base for the sector and reduced the cost of capital.
The rise in raw material costs has led to an increase in realty prices, do you see that impacting demand? How will it impact the buyer sentiment?
Rising input cost is a major concern for the real estate development community. The cost of raw materials has already seen an upward move of ~25% and this may lead to cost overrun for many developers. With the increase in raw material prices, and geopolitical tensions, coupled with supply-side challenges, the rise in property prices seems to be inevitable. We have already seen ~8-10% increase in prices and a similar increase over the next year looks likely.
This may slow down the pace of growth in the short term, but fundamentally the demand will remain robust over the next 3-4 years. In fact, this expectation of increase is sustaining the sales momentum as buyers look to lock-In price before the increase further.
Further, the importance of owning a home continues to provide further impetus to the ongoing buoyancy.
With work from home becoming the new normal, how will the commercial real estate sector remain relevant?
Pandemic has introduced us to the hybrid model and has led to the acceptance of a flexible work model. During early days of the pandemic, most feared that office spaces may become redundant but by now the consensus is that while employers are much more amenable to hybrid models, offices are not going away anywhere.
The confidence in office space owners and commercial occupiers is at an all-time high and the demand is gradually increasing.
What is the biggest challenge for the real estate sector currently?
Increasing interest rates, rising commodity prices, and difficulty in getting construction finance continue to plague the real estate sector.
What kind of growth do you expect to see in the real estate market in 2023?
We expect real estate demand to remain robust over the next 3-4 years, even if the pace of growth moderated a bit in the short-term as consumers digest increases in interest rates and property prices. Demand in India is structured and despite the increase, affordability remains high as wage growth has significantly out-stripped property price growth over the last 6-7 years.
In a time when markets are so volatile, do you believe real estate is a safe investment bet?
Yes, we do believe that real estate investments can help tide over this volatility. In fact, with a 10-20% drop in equity markets, investors are hunting for non-market linked, inflation hedged returns. Real estate is best suited to offer these characteristics. And fintech platforms are making quality, risk-managed opportunities available to a much broader audience than ever before.
How new-age platforms will lead the way in making domestic capital participate in the sector?
Financialization of real estate, such REIT’s, fractional investing and secured fixed-return investment opportunities is making real estate accessible & affordable. Through these new-age platforms, any investor can get access to high-quality, fixed-return opportunities secured by real estate. The idea is to bring personal investing at par with institutional and create access to opportunities, which were for long-only made available to elite investors. Apart from this, these platforms also provide institutional quality investing experience combined with digital convenience & transparency.