REAL ESTATE AS AN ASSET class may not have performed well for nearly a decade, but the sentiment is changing for good. While the world is heading into a recession, the Indian economy is set to grow at an estimated 6.9% in FY23. With increasing urbanisation and demand for office space, real estate looks set to cash in on the growth boom. According to CRISIL estimates, the sector is likely to grow to ₹65,000 crore by 2024 from ₹12,000 crore in 2019, and contribute 13% to the country's GDP by 2025. While some have already joined the party post Covid when borrowing rates had hit decadal lows, the interest rate cycle has changed now. So, should you still buy a property in 2023?

"In India, home prices stayed flat between 2015 and 2020," says Amit Goyal, CEO, India, Sotheby's International Realty. "In the last two years, the sector has clocked robust sales due to pent-up demand, stable prices, benign interest rates and government incentives... In fact, housing sales across the top eight cities in 2022 are expected to breach the previous peak of 2014, going by the momentum in sales during the festive period and the first three quarters of the year. Prices in good localities are up by 7-15%. The next five years could be positive for investors who buy the right kind of property," he adds.

According to the Housing Price Tracker Report, 2022, prices across the top eight cities in India — Delhi-NCR, Mumbai Metropolitan Region (MMR), Kolkata, Pune, Hyderabad, Chennai, Bengaluru, and Ahmedabad — grew 6% year-on-year in Q3, 2022 amid robust demand and launches by top developers. Delhi-NCR saw the highest increase in residential prices at 14% YoY, followed by Kolkata and Ahmedabad at 12% and 11%, respectively.

Rising Interest Rates

The Reserve Bank of India has hiked the repo rate by 125 basis points to 6.25% so far in FY23, prompting banks to revise their lending rates. The RBI policy rate is now at its highest level since August 2018.

"Affordability of real estate has been impacted as housing loans became dearer for homeowners. However, there is renewed enthusiasm now in home ownership as well as rising income, which are likely to offset the impact," says Tarun Birani, founder and CEO, TBNG Capital Advisors.

So, how much return should one expect from real estate stocks going forward? "If one has real estate in one's portfolio, he/she should look at historical price trends as well as rental yields, along with key factors such as location and facilities to gauge the overall return potential. These factors will continue to play a major role in expected returns," adds Birani.

With prices on the rise, it is important that real estate returns beat inflation. "Focusing on specific properties should give you a rental yield of 2-3% along with reasonable appreciation in line with a long-term inflation of 5-6%. Thus, on a property specific basis, 7-8% appreciation is a reasonable expectation for the next three-five years," says Birani.

Residential Vs The Rest

If you are buying a residential property to live in, it is advisable to go ahead. However, if you are buying a second home for investment purposes, you may consider exploring options, including commercial property, REITs or even fractional ownership.

Commercial property is preferred for higher rental yields. However, affordability remains key, and such properties work best for HNIs and UHNIs.

"India remains one of the low-cost Grade A office rental markets, with a vast pool of English-speaking and qualified human talent. It will continue to be the preferred destination for large global captive centres, especially when most companies in the West are looking to cut costs," says Sotheby's Goyal.

If you cannot get into commercial property directly, there are other options. Real estate investment trusts (REITs) have made investing in commercial property simpler. It is good for even those who may not have enough money to buy any real estate, but want to diversify investments into this asset class. "One can invest in REITs with as little as ₹10,000-15,000 in the primary market and one unit in the secondary market. It is also a source of regular income, since it is mandatory to distribute more than 90% of the income as dividend to investors on a regular basis," says Goyal.

There are three REITs listed in the stock market — Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India REIT, which have given returns of 3.01%, 3.02% and -1.57%, respectively, in the last one year.

There are likely to be more REIT listings in the remaining months of FY23, according to experts. "With India having 528 million square feet of occupied Grade A office stock as of September 22 and global institutional investors continuing to invest in annuity assets, we expect more REIT listings over the next two-three years. Developers such as DLF, Phoenix Mills and Oberoi Realty have already highlighted their medium-term plans to consider REIT listings," ICICI Securities said in a report on REITs recently.

Fractional ownership has also grabbed attention. Like REITs, fractional ownership makes it easier to own a small stake (a fraction) of an expensive property with lower ticket size. Platforms, including Strata, Aasthy and Myre Capital, among others, pool in funds from different investors to buy a big-ticket property and allot ownership in fractions or otherwise according to the amount collected per person. Not only one receives a regular cash flow, but also capital appreciation while selling his/her respective fraction.

"Unlike REITs which are regulated by SEBI, fractional investments are not regulated and therefore carry a higher risk-return reward. REITs are more liquid and can be easily transacted/sold, solving the biggest problem associated with real estate investments i.e., getting assets liquidated when required," says Goyal.

Real estate investment returns may not beat other financial assets such as stocks and mutual funds, but it is still an important part of one's asset allocation. However, its illiquid nature is a challenge. So, while it's not advisable to go the whole hog, from a diversification perspective, real estate investment makes for a well-balanced investment portfolio.

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