Download the latest issue of Business Today Magazine just for Rs.49
Investing in real estate? Choose carefully for steady returns

Investing in real estate? Choose carefully for steady returns

Experts believe that the wide gap between demand and supply in residential real estate will keep prices firm over the long run. If chosen carefully, investment in real estate is likely to give steady returns.

Are the rising real estate prices sowing seeds of doubt in your mind about the future of your proposed investment in residential property? Do you wonder whether the bubble is set to burst and if it is better to wait for prices to fall a little before taking the plunge?

Given the trend of rising property prices over the last few years, the price of the property you have shortlisted will most likely keep going up as you wait.

Residential real estate has one asset class whose prices have been steadily rising in most markets. Though analysts have been saying the residential property market in locations such as the Delhi-National Capital Region and Mumbai is ripe for a price correction, developers have been able to hold on to prices even as buyers wait for a fall. Given the demand-supply imbalance, the trend is likely to continue and your investment will in all possibility stand you in good stead even when other assets take a beating.

Data for the past few years show that real estate has been a rewarding asset class. For example, in 2011, one of the worst years for equities when the Sensex fell nearly 25%, prices of homes in most Indian cities remained firm despite the overall economic uncertainty, both in global and domestic markets.

During the year, prices in nine out of 15 cities covered by the National Housing Bank's residential index, called Residex (see chart), rose, except in Ahmedabad, where prices remained flat. In comparison, if you had invested in real estate stocks, the value of your investment would have fallen by nearly 50% between December 2010 and December 2011.

Even if one considers the period from end-2008 till March 2012, which saw a widespread slump in equity and property markets worldwide due to the global financial crisis, real estate in India gave positive returns in most instances. As many as 11 out of 15 Residex cities gave positive returns during the period, the only exceptions being Hyderabad, Jaipur, Kochi and Bengaluru.

Commodities such as gold and silver, however, were the other winners, beating real estate.

Experts believe that the wide gap between demand and supply in residential real estate will keep prices firm over the long run. "NHB data itself show shortage of more than 20 million homes. There is an acute shortage of homes, especially in and around the main cities due to population migration that is happening due to growth opportunities. As a result, prices have generally tended to increase over the medium to long term," says Balaji Raghavan, CEO & CIO, Real Estate Fund, IIFL.

Om Chaudhry, Founder & CEO, FIRE Capital and Chairman, Astrum Homes, agrees. "The shortage in many markets and the sticky nature of realty prices in India contributed to the firm trend," he says.

Asset Mix: The Sensex and the BSE Realty index have declined over the years while other asset classes such has real estate, gold and silver have given decent returns
Chaudhry says real estate and commodities provide safety from stock market uncertainty. "When the stock market was going down, investors shifted towards commodities such as gold and silver (as shown by the data) and real estate as they are safer options. Real estate prices do not fluctuate as much as stock prices, keeping the money of investors safe, and gives good returns."

Ashwinder Raj Singh, executive vice president and head, sales and distribution, India Homes, says there is another reason real estate prices in India have been firm-red tape. "Major Indian developers are sitting on millions of square feet of land, in part because they don't want prices to plummet, but also because India makes it incredibly difficult to obtain permissions and approvals to build residential projects. The licensing process is long, cumbersome and often arbitrary, not to mention notoriously corrupt."

But amid the general positive trend, why did certain market such as Hyderabad, Jaipur, Kochi and Bengaluru failed to perform? Experts mention factors specific to the market and the resultant demand-supply dynamics. Raghavan explains that Hyderabad, Jaipur, Kochi and Bengaluru have different demand drivers. For example, Bengaluru is driven by the information technology industry, and prices there largely follow the industry's fortunes. The Residex data show that prices fell around the 2009 period and then slowly recovered from 2010. Jaipur and Kochi, on the other hand, have not developed at the same pace as other urban centres. The demand for homes in Kochi tends to be driven a lot by population working outside the country and so prices there have been subdued because of the global recession. In Hyderabad, political uncertainty and its impact on business growth may have had a role to play.

Ashwinder Singh feels there is no stopping the prices from rising. "Property prices have outperformed equities, currency and bonds by a wide margin. As long as the Indian economy continues to grow and Indians continue to gain purchasing power, prices are likely to continue to rise," he says.

Chaudhry, while he is positive on real estate as an investment option, says investors should exercise caution while taking purchase decisions. "Real estate is and will remain a good investment option as prices do not fluctuate drastically. But caution should be exercised as it is the hard earned money of customers, and there are developers out there who are working beyond what their balance sheets," he says.

Raghavan of IIFL feels that a real estate fund like the one he runs can help investors even out the risk of putting money in a single property. "Investors need not be restricted to a single property. They can invest in a real estate private equity fund. This way their money will be invested in more secure structures and risk better mitigated (as the same money will be spread over five-six underlying investments). Investors can also benefit from the expertise of professional fund managers for sourcing the best projects from across the country," he says.

Raghavan feels returns are likely to remain high in and around the urban centres, namely Mumbai, Delhi, Bangalore, Chennai and Pune. Emerging Tier-2 cities such as Ahmedabad, Baroda, Nagpur, Jaipur and Chandigarh also offer select investment opportunities.