A Real Promise Of Stability

Updated: May 18 2003, 05:30am hrs
A silent housing revolution has swept through India. Slowly but surely, housing sector has become one of the fastest growing business segments in the country unperturbed by the global recession, Iraq war or even SARS. A rich brew of favourable factors including a tectonic shift in government policies that allowed tax breaks on housing loans, rising disposable incomes, and falling interest rates have led to boom in the housing industry. Traditionally, real estate has always been a reliable investment avenue for the average person in India besides gold. But the rapid changes have given a new dimension to real estate as an investment. The real estate market is abuzz with action and this may be an opportune time to invest in certain geographical locations. There are a few good reasons to do so -- property rates have undergone a substantial downward correction in recent years and experts do not expect the decline to be very steep in the near future, especially for up and coming locations such as the suburban pockets of Mumbai city. Falling housing interest rates are also luring investors to this sector.

Hiranandani Constructions Pvt Ltd managing director Niranjan Hiranandani points out that the opportunities, the quality of flats and premises available are excellent at present. The variety of locations and the amenities offered is unprecedented.

Markets are perceived as being close to stabilisation. Hence, the probabilities of gaining capital appreciation are better today than at a later date.

Moreover, stable yields are expected from select properties in the commercial as well as residential segments - approximately 12-13 per cent and 5-7 per cent respectively, thereby making investments in the near future a lucrative proposition, according to Cushman & Wakefield executive director Chanakya Chakravarti.

Colliers International chief executive office Akshaya Kumar feels that prices have bottomed out and will now move up. In fact, residential prices have already started appreciating and metropolitan cities have registered a 7 to 8 per cent increase in the last quarter. "The prices will flatten now and there will be some breather for the next couple of months," he added.

A property investment review prepared by Knight Frank says that investment in property is being viewed as a serious alternative to other forms of investment. With interest rates nose-diving and the stock market not showing any signs of recovery, investment in real estate has begun to look more lucrative.

Moiz Lokhandwala from Lokhandwala Builders feels that the market is very volatile at present and the all-time low that the industry has seen in the last couple of years is now beginning to look like a thing of the past.

While metropolitan and major cities like Mumbai, Delhi and Bangalore have seen the highest investment in the country, some of the smaller cities like Pune are also doing well. The rates of return though, have fallen with the falling rates of interest.

Mr Chakravarti informed that stabilisations have been recorded at locations such as Central Mumbai (Worli-Lower Parel) and in the suburbs of Mumbai. Similarly, for prime locations, residential properties are expected to continue at the present rates, without any significant decline, he added.

Adds Mr Kumar: There is a huge supply overhang in the commercial real estate market. Hence, there is a possibility of pressure on the prices.

There will not be large acquisitions on the commercial side at least for the next two to three years, he added. Investors are interested in leased properties which offer the best rate of returns, around 10 to 12 per cent in the commercial sector. Also, in the residential properties, the market is looking interesting in properties where the rates are between Rs 2,000 to Rs 2,200 per sq ft for new constructions.

The Knight Frank report adds that values have stabilised in non-CBD areas. In fact, values of quality real estate in good locations have actually begun looking up. At Technopolis Park, the capital value has escalated from Rs 6,100 per sq ft to Rs 6,400 per sq ft over the past year.

Marathon Realty Ltd director Mayur Shah also sees a fantastic opportunity in the rental housing in future, which has not been explored. The lowest strata of society cannot afford to own a home as the prices are still pretty steep, especially in Mumbai. It is here that trust and investment companies can step in and go for mass housing projects and there can be no better time than now.

Mr Hiranandani feels that there are areas where infrastructure is not developing in a manner that should be happening. For instance properties in the suburbs of Mumbai are developing much faster than the city. There is a tendency for people to migrate to townships. Even corporates find the suburbs a better place to work and live. New schools, colleges and hospitals are coming up in the suburbs and generally people enjoy an enhanced quality of life.

Property investors can expect returns of 12 to 14 per cent on their investments. But a great deal depends upon factors like the timing of the investment, tenure of lease and the size of the investment. Returns from commercial real estate are certainly more attractive. However, it is important to understand that from a long-term perspective that real estate investment does not enjoy the same kind of liquidity as stocks, bonds or mutual fund products.

Therefore, real estate investments are certainly not an instrument for short-term. Mr Hiranandani advises that since investment in real estate is illiquid it is advisable to keep enough wealth in banks and other investments which are to be used for immediate and urgent needs. Individuals should invest in residential housing and shops. Commercial property should be with persons who have deeper pockets and longer-term view of their investments, he added.

From a long-term financial-returns perspective, it is advisable to invest in higher-grade commercial properties. However, for small-sized investments (up to Rs 5 crore), it may be better to analyse prime residential developments. To account for occupancy and rental risks, Mumbai, Bangalore along with the National Capital Region (Delhi, Gurgaon and Noida) and Pune are attractive investment locations. These locations are being considered favourably by occupiers with a long-term view, thereby making them safer avenues for commercial investments.

CB Richard Ellis South Asia managing director Anshuman Magazine adds that in spite of the fact that real estate is a very profitable investment, most individual investors do not have enough capital to purchase a wide variety of real estate to diversify their portfolio and are concerned over the lack of liquidity in owning real estate directly. Hence, a derived form of investing in real estate through Real Estate Investment Trusts (REITS) may be considered. An REIT operates like a mutual fund, where investments of individual investors are consolidated together to invest in real estate, rather than investing in stocks of companies (as in the case of mutual funds). Its units are freely traded, often on a major stock exchange.

REITs provide an opportunity to retail and institutional investors to include professionally-managed real estate in their investment portfolio and share the gains of escalation in property prices without having to make large amounts of investment. Further, REITs provide returns in the form of dividends to investors from rental income earned on the underlying real estate assets. It also affords the investors access to the commercial real estate market in a more liquid form (with lower denominations of investment) as the instruments are publicly traded. India has been contemplating introduction of these instruments.

Another avenue for investment is in the retail sector. As compared to volatile returns from stock markets and limited returns from bank deposits, capital appreciation of property can be seen as a safer (low risk) and high yield investment alternative. The advent of the retail boom (over 30 per cent growth rate in recent times) coupled with the leisure and entertainment sector, has presented investors with an attractive proposition of investing in developments housing players from these sectors.

Though, traditionally, retail investments are confined to equity, it may also be looked upon as an opportunity for institutional investors to lend funds to developers, considering the relatively secure returns. Apart from capital appreciation, investment in real estate also yields rental earnings as a regular source of revenue.

Further, the rental earning is supplemented by an initial deposit payable by a lessor, which though refundable may be utilised to earn interest. With the entry of multinationals into India, owners of real estate in various segments such as office, residential and retail have gained confidence in leasing out premises to earn monthly returns on such investment.

The safety of such investment has been further enhanced by detailed lease agreements protecting the rights of both the tenants and the property-owners. This changing trend of development of investment grade buildings by developers can be seen as a source of encouragement to infuse institutional funds into real estate assets, who have typically refrained from investing in real estate due to absence of professionally managed funds and unstructured markets state perpetuating safety and liquidity concerns.

However, the investment inflow has been primarily from the unorganised investor community as opposed to companies, funds, or financial institutions. This scenario may however witness a transition due to factors such as recession, liquidity crises, lack of investment avenues, poor performance of stock markets and declining interest rates resulting in increased interest from organised investors.

Mr Hiranandani has a few tips for investors to play safe -- good title to the property, good location, good planning, good developer, and an area which is growing and has potential for growth.

As to what can investors hope in the form of support and concessions from the government, Mr Hiranandani adds that duty rates should fall as per National Housing Policy to 2 per cent to 3 per cent. Fiscal relief in terms of interest deductions on housing loans will continue. The assessment taxes for properties should be rationalised. The Rent Act will incentivise investment in housing.

Traditionally, real estate has been a popular form of investment in India -- though used more as a wealth reserve (with the pure motive of capital appreciation), than a regular income-generating asset.

However, the investment inflow has been primarily from the unorganised investment community as opposed to companies, funds or financial institutions. This scenario, may however, witness a transition due to factors such as recession, liquidity crises, lack of investment avenues, poor performance of stock markets and declining interest rates resulting in increased interest from organised investors, opined Mr Magazine.

Housing finance companies (HFCs) and high networth individuals (HNIs) and also corporates have recently begun to look at investments in real estate for better returns and also as a hedge against falling interest rates.

For example, investors owned 40 per cent of the properties in Nariman Point in the 1990s. These investors, primarily HNIs, invest through their own funds and at times leverage the investment by taking loans from financial institutions.

Presently, the commercial developments, such as the ones at the Bandra-Kurla Complex, are predominantly corporate-owned. Even as investments in real estate remains a lucrative option, the returns on property will stabilise due to expected stability in the interest rates. A correct tenant mix and location will prove to be the key performance indicators for investments. Overall, the proposed introduction of Real Estate Mutual Funds and relaxation in norms for foreign direct investments will boost investments in the real estate sector.