HAVE YOU EVER pondered about the true intrinsic value of real estate? Contrary to common belief, there’s a richer, more complex dimension that extends beyond just the present value of future cash flows. In the realm of perception, the adage ‘beauty lies in the beholder’s eyes’ also holds true of how an owner perceives a property’s real worth.

This intangible valuation metric that, at times, transcends numbers is known as emotion, one that is captivatingly woven into the tapestry of Indian cinema. Consider the poignant tale of Balraj Sahini, a marginal farmer in the Bollywood classic Do Bigha Zameen, or the compelling pride of Amitabh Bachchan’s character in Deewar. In a memorable scene, when a realtor sarcastically tells Bachchan that he is not cut out for business as he overpaid for a building that he would have willing sold for a couple of lakhs lesser, Bachchan retorts: “Dhanda toh aap ko karna nahi aata (You do not know how to do business), Mr. Agarwal.” Even as the non-plussed seller gazes at the building, Bachchan’s character reveals he would have paid an additional ₹10 lakh, reflecting on his mother’s hard work as a construction worker at the site 20 years ago. That’s intrinsic value for you!

This perspective, however, is not limited to reel life. The late renowned investor Rakesh Jhunjhunwala spent close to ₹400 crore to purchase apartments in south Mumbai’s Ridgeway Apartments complex between 2016 and 2017. He later demolished the entire structure to build a 14-storey residence, not as a financial investment but as a legacy for his family. Jhunjhunwala’s action underlines that sometimes the value of real estate transcends its cost, becoming a symbol of personal achievement and heritage.

It’s no surprise then that real estate remains a favoured asset class among Indians.

Home sales are soaring post-pandemic, smashing records in top seven cities (MMR, NCR, Pune, Bengaluru, Hyderabad, Chennai and Kolkata). In just nine months of CY23, a whopping 3.49 lakh homes were snapped up, higher than the 3.65 lakh units sold in 2022 and the 2.36 lakh units in 2021. In terms of value, the market is booming: Homes worth a staggering ₹3.49 lakh crore changed hands, up 7% from ₹3.27 lakh crore in the whole of CY22, as per Anarock Property Consultants. The Mumbai Metropolitan Region (MMR) tops the value chart at ₹1.64 lakh crore, with the National Capital Region (NCR) a distant second with ₹50,188 crore.

Mumbai has emerged as the most expensive market in the country. In the costliest apartment ever sold in India’s real estate history, J.P. Taparia, founder of contraceptive maker Famy Care purchased a sea-view luxury triplex apartment for over ₹369 crore in South Mumbai’s Malabar Hill earlier this year. The over 27,000 sq. ft. three-floor luxury apartment in the super-luxury residential tower Lodha Malabar is located on the plush Walkeshwar Road, overseeing the Arabian Sea. But a record block purchase of apartments took place in February this year by family members and associates of Avenue Supermarts’ owner Radhakishan Damani, whom the Big Bull Jhunjhunwala considered his mentor. The ₹1,238 crore deal involved the purchase of 28 premium apartments in Worli (Mumbai).

Not surprising that Liases Foras Real Estate Rating & Research reveals that over the past 12 months, the market for apartments priced at ₹10 crore and above has been flourishing across the country. The rush in the high-end segment is such that even the Delhi Development Authority (DDA), having built affordable housing for over 60 years, is now venturing into luxury housing. For its upcoming project, DDA has priced HIG apartments between ₹2 crore and ₹2.5 crore, and penthouses at about ₹5 crore.

Incidentally, the annual price rise across the seven major cities is significantly higher in recent times. “If we consider data trends of the top seven cities in the past decade, that is, between 2013 and 2023 (9M, January-September), then average residential prices have seen the highest yearly rise in 2023,” says Prashant Thakur, director, research, Anarock. While average property prices in 2023 went up 11% in the seven cities, Hyderabad saw the highest annual jump of 18% to ₹5,400 per sq. ft. (Q3CY23). Prices in Bengaluru went up 14%, followed by NCR and MMR at 12%. But as expected, the cumulative value of homes in Mumbai rose the highest to ₹1.64 lakh crore (See: Real to surreal).

The last best yearly rise in the past decade was in 2013 when top seven cities saw their collective average prices rise 7% on a yearly basis — from ₹4,558 per sq. ft. in 2012 to nearly ₹4,895 per sq. ft. in 2013. Thereafter, the growth in prices has either reduced year-on-year or remained the same until 2022. Irfan Razack, whose company Prestige Estates entered the Mumbai market in 2021, had told Fortune India in an earlier interaction, “Real estate is an illiquid asset, but gives you much more gains over a period of years if the location is good, the property is right, and the developer is reputed.”

Whether the buyers have got it right or not is a different question but that realtors are raking it in is evident in the performance of realty stocks with the real estate index gaining 180% to 5,571.48 over the past three years, against 51% by the benchmark indices. The combined market cap of prominent listed players surged to a new high of ₹3,87,857 crore as on November 24, 2023 against ₹1,41,327 crore in 2020.

What’s pertinent to note is that while end-user demand has been fuelling sales in the ultra-luxury bracket, it’s the investors who are sensing an opportunity to make the most of the rally. While ready-to-move-in homes still top the wish-list of most home seekers in the top seven cities, newly launched units are gaining increasing acceptance. “This traction has been building up ever since branded developers started cornering the fresh supply market with projects that elicit buyer confidence and have all the features they seek,” says Thakur.

A study by Anarock Research shows that of the approximate 1.14 lakh homes sold in the first quarter of the year across the seven cities, over 41% were in newly launched projects. “This indicates that investors are back in the market. Early-stage, under-construction homes offer the kind of cost arbitrage that makes residential real estate attractive to investors who have largely given housing a miss over the past three-four years,” mentions Thakur. While MMR has the highest inventory among the seven cities, NCR is a distant second (See: Block by block).

For now, prices seem to be on the boil. Average residential prices across the seven cities increased 8-18% in Q3CY23 over the year-ago quarter, primarily owing to an increase in the prices of construction, raw materials, and overall buoyancy in demand. “We may see up to 12% increase in average prices in 2024 if the current momentum continues,” says Thakur.

Developers are eager to make the most of the dream run. Prestige, for instance, has almost 63 million sq. ft. spread across 24 residential projects, but the size and scale of each project have gone up significantly. “At Prestige City in Sarjapur (near Bengaluru), we thought we’re building it (the project) over 10-12 years, but when things are very good, we said, why not do the whole thing and now we’re going to complete about 7,000 flats at the same time,” Razack told analysts post Q2 earnings..

Betting On High Returns

The buoyant sentiment is not lost on wealth managers, who continue to be bullish about the sector’s prospects given the improving affordability and the fact that mortgage as a percentage of nominal GDP in India is only 11% compared with 60-70% in more developed markets such as the U.S. and U.K. “The sub-₹2.5 crore segment in the residential space has huge demand in the top five-six cities. Unsold inventory has come down 45% in the top seven cities and absorption of 169 million sq. ft. happened against supply of 138 million sq. ft. in the last one year itself. There was this fear that real estate was another Uber model where people were happy to just stay in rent and not buy houses. That seems to have changed,” says Rajesh Saluja, MD & CEO, ASK Wealth Advisors.

With banks wary of real estate funding and funding from non-banking financial companies (NBFCs) hard to come by, alternative investment funds (AIFs) such as real estate funds are finding an opportunity to clock in gains. ASK Property Fund, the real estate private equity arm of the ASK Group, closed its sixth fund, raising more than ₹1,500 crore, early last year. “Last-mile construction funding from small- and mid-sized developers,” says Saluja. These funds are typically targeted at high networth individuals and family offices. For instance, more than 60% of investors in the ASK’s sixth fund were repeat investors from its previous funds, including domestic investors, offshore entities, and family offices, with an average ticket size of around ₹10 crore.

“Instead of clients investing in real estate and buying apartments, there are much better ways to participate in this story through properly managed funds, be it in residential or commercial or REITs,” says Saluja. While in the initial years, equity oriented real estate funds were the flavour of the season, of late, the focus is on mezzanine (debt-equity hybrid financing) deals. “Earlier, vintage pure equity funds were targeting 20%-plus kind of return, but barely managed to deliver 10-11%. But after the clean-up (Rera, demonetisaton and GST), most funds are focusing on mezzanine transactions. These funds are delivering 18-19% gross return with quarterly payouts. Because of limited capital availability, developers are happy to get financed at 18-19% because of the price appreciation seen over the past two-three years,” says Saluja.

Image : Photograph by Getty Images

While real estate funds are more tailored to suit the investment needs of HNIs given the high-ticket size, retail investors have the option of investing in financial assets through real estate investment trusts (REITs). REITs offer investors an opportunity to earn dividend income besides capital appreciation. REITs in India, however, offer only an opportunity to buy into commercial properties as current regulations bar them from the residential segment. Initially, the minimum investment in REIT was set at ₹50,000 with a lot size of 200 units, but to increase liquidity and retail participation, market regulator Sebi has lowered the minimum investment threshold to ₹10,000-15,000 with a lot size of one unit.

Currently, there are three REITs listed on the bourses — Brookfield India REIT, Embassy Office Parks REIT and Mindspace Business Parks REIT. According to a report by Geojit Financial Services, as of May 2023, the three REITs significantly outperformed U.S. office REITs by 2,662 basis points, delivering an internal rate of return (IRR) of 13.4% since April 2019. Indian REITs distribute 90% of the income as dividend as they invest 90% in rent-generating properties with just 10% exposure to under-construction properties.

Though year-to-date (YTD), two REITs (Brookfield and Mindspace) are down 12% and 4%, respectively, and Embassy delivering nil returns, brokerage house JM Financial is bullish on the trusts given their stable cash flows and 6-8% distribution yields. Of the three, JM’s pick is Embassy REIT, since it derives maximum value from Bengaluru, the country’s largest office market. Embassy REIT owns Asia’s largest office portfolio on a leasable area basis of 45 million sq. ft. (msf), of which 34.3 msf is operational, 7.9 msf is under development and 2.8 msf comprises upcoming projects. With a 12-month dividend yield of 7.1% and a total shareholder return of 18.6%, the brokerage house has a one-year target price of ₹340 for the REIT.

On why the opportunity in commercial estate seems attractive, Umang Papneja, CEO, Julius Baer Wealth Advisors India, says, “For a developer, who builds a commercial property ground-up and then leases it out, the IRR is around 15-16%, and if the property is sold to a REIT, which mostly trade at 8%, it is akin to selling a bond, which is trading at 15%. As a result, the capital gain could be huge with an IRR of more than 20-25%. For an investor who wants a stable income with no development risk, REITs would be a better play.”

Though financialisation of real estate seems to be catching momentum, Sandeep Das, CEO, Centrum Wealth, mentions that clients can’t resist investing in hard assets. “No matter how much you tell them, the attraction of owning physical real estate still enamours clients,” says Das.

One way or the other, what is certain is that the allure of real estate endures. And as the saying goes, the best time to invest in real estate was always five years ago!

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