Real estate’s big comeback: Where to invest and what’s driving the boom

THE REAL ESTATE sector was severely hit by the demonetisation of ₹500 and ₹1,000 bank notes on November 8, 2016. As everyone from developers to buyers was used to cash transactions, at least partially, this reduced the cash in circulation as well as the number of transactions. Developers lost revenue and many projects had to be terminated due to cash crunch.

A couple of months later, another big change came. The Real Estate (Regulation and Development) Act (RERA) in April 2017 made it mandatory for developers to register their projects with the Real Estate Regulatory Authority and get the required approvals before launching projects. Increased compliance costs, penalties and delayed launches compounded the problems of the sector.

But there was more to come. The Insolvency and Bankruptcy (Second Amendment) Act of 2018 brought buyers within the definition of financial creditors, opening floodgates of petitions even in case of minor delays in project completion. Between June 2018 and November 2019, homebuyers filed more than 1,800 cases; the courts held that any delay would amount to default under the IBC even if the insolvency process had been initiated by a single buyer. Then, in 2020, Covid became the last straw on the camel’s back. Residential and commercial projects got stalled as revenue streams dried up. KPMG estimates that Covid-19 inflicted a loss of ₹1 lakh crore on the real estate sector in FY21.

It is said that ‘the darkest hour is just before the dawn’. Things began looking up after March 2021. “The real estate sector was struggling between 2012 and 2020 and going through consolidation due to regulatory issues. The recovery in terms of prices and sales started in March 2021. The sector is now doing well. The next three-five years look good,” says Sharad Mittal, founder and CEO, ArnyaRealEstates Fund Advisors. “We are in the middle of an upcycle, which typically lasts seven years. A lot of price rise has been built in. There is limited opportunity for a further rise. But demand is high. It is a good time to invest in the sector,” he says.

However, real estate investments are no longer restricted to buying a second house and giving it on rent. While rental yields and tax-saving benefits continue to be a big draw for investors, they can enjoy a piece of the real estate pie in other ways as well. Here are the five ways to invest in real estate:

1. Real estate alternative investment funds (AIF): These AIFs pool in capital to invest in residential, commercial and mixed-use properties. They also invest in development projects. Investments by AIFs in real estate have touched ₹75,500 crore in a decade, the highest among all sectors, according to Sebi data compiled by ANAROCK Research.

The capital-guzzling business requires money in two stages — the land-buying and approval stage for which banks do not lend, and the construction stage where banks can help. So, the first stage is open to AIFs and private equity funds. AIFs focus big time on risk management. Before AIFs, most HNIs and family offices used to invest in local properties. “But through AIFs, the money goes to projects spread over, say, eight to ten cities over 18 months or so, reducing the risk of concentration significantly,” says Mittal.

AIFs stipulate a minimum investment of ₹1 crore from investors below a specific net-worth. However, the payments are spread over at least 18 months. The return is in the form of interest. The life of a typical fund is five-seven years. “It is a good way to earn yields,” says Mittal. Most AIFs generate returns in late teens (gross return of 18-20%). Investors can make 15-16% depending on the fee structure. “AIFs allow investors with smaller cheques to be part of a bigger pool with access to marquee properties and professional management,” says Mittal.

2. Real estate investment trusts (REITs): REITs own, operate and finance real estate properties. They can be a good option for investors who want exposure to the sector without management responsibility or direct ownership. Although REITs were introduced in 2014, the first REIT in India was launched in 2019. There are only four REITs in India — Brookfield India Real Estate Trust, Embassy Office Parks REIT, Mindspace Business Parks REIT and Nexus Select Trust. “More REITs will attract more participation from investors who don’t want to take specific investment calls. Buying a property requires an active investment strategy but REITs meet the need for a passive investment strategy,” says Vivek Rathi, national director, research, Knight Frank India. Publicly traded REITs are regulated by Sebi. “There is a lot of comfort in this space due to the regulations,” he adds.

3. Land investment: Buying a plot of land has always been a good way to invest in real estate. However, Covid has triggered an unprecedented demand for plots. “Post Covid, people have developed a penchant for independent houses,” says Pankaj Kapoor, founder & MD, LiasesForas. According to LiasesForas, 1,16,052 plots or villas were sold in the top 60 cities of India during the 12 months ended September 2024, a 30% increase over the previous year and 137% over the Covid year of 2020 (49,027 units). “In the last few years, many people have earned well from the stock market and invested in buying land,” says Kapoor. For investment, the probability of density creation and potential for infrastructure connectivity should be high, he says.

4. Real estate stocks: The BSE Realty Index has been one of the top-performing indices in the last two years. The index, which tracks the country’s ten biggest real estate developers such as DLF, Macrotech Developers, Godrej Properties, Prestige Estates, Sobha and Phoenix Mills, is up 36% since the end of December 2023, outperforming the benchmark BSE Sensex that has risen 12% during the period. In the last two years, it has rallied 144.2% compared to a 33.1% rise in the BSE Sensex. “The sector’s strong performance is attributed to a high double-digit growth in revenues and profits by real estate developers in recent quarters,” says Kapoor.

The total net sales of the 10 developers which are part of the BSE Realty index rose 25.2% in Q2 FY25. Their net profit rose 28.7% during the period. This was a much better financial performance than the rest of corporate India, which reported a low single-digit growth in revenues and a decline in net profit in Q2FY25.

5. Rental investments: This option never goes out of fashion. A second house serves multiple purposes — rental yield, capital appreciation, generational wealth. A second house or shop or any other commercial asset also serves as a shock absorber in case of a financial emergency. The residential rental yield is 2-3%. The maintenance cost is 0.5-1%. “So, a house is not really for earning returns but for capital appreciation,” says Rathi of Knight Frank. However, investment in commercial real estate makes a lot of sense due to the high rental yield of 8.5-10% and capital appreciation. “In the last few years, commercial spaces have done well in terms of occupancy. So, the rents are going up, making them a good investment option,” says Rathi.