Why HNIs are investing more in real estate, debt than in equity market now

By: | Published: June 26, 2018 3:42 PM

HNIs are gradually shifting away from the equity market to real estate and debt. So, what does this new trend actually mean?

real estate in india, real estate investment, HNI, equity market, debt, RERA, GST Given the rise in interest rate scenario in the country, reallocation of the HNI portfolio is bound to happen, leading to higher flows towards asset classes like debt and real estate.

After a long time there seems to be some good news for the real estate sector. If industry sources are to be believed, high net worth individuals (HNIs) are gradually shifting away from the equity market to real estate and debt. Data available with the Association of Mutual Funds of India (AMFI) also suggests the same thing. So, what does this new trend actually mean?

Real estate experts say that while the initial data suggests movement of HNI investments from equities to other asset classes, this data is for a very short span and one will have to wait for the actual trend to establish. However, “given the rise in interest rate scenario in the country, reallocation of the HNI portfolio is bound to happen, leading to higher flows towards asset classes like debt and real estate. Another major factor for reallocation of the HNI portfolio has been the volatility in the equity market which has been trending for quite some time now. This volatility has, in fact, impacted the equity-based mutual fund investments as well,” says Divya Seth Maggu, Associate Director, Valuation & Advisory Services, Colliers International India.

Rising bond yields have brought the debt schemes back into the realm of investment. India’s 10-year government bonds have seen a rising uptrend since October 2017. On the real estate front, following a tapering down of property price appreciation in residential real estate, especially in the top cities, the ultra-rich investors have been focusing on commercial assets, especially pre-leased income generating assets. With office yields dropping to sub 9% levels, investors are looking at development assets as well unlike earlier when typically, only ready properties were acquired.

“Commercial space vacancy has dropped to single digit levels in some markets in Pune, Hyderabad and Bangalore due to robust demand from corporates. Pre-leasing is going strong as well, indicating sustained demand and occupier interest in commercial spaces. With other positive factors in real estate like RERA being implemented, weeding out of small fly-by-night operators and overall government push to enhance transparency and accountability in the sector, real estate is becoming an attractive alternative investment for HNIs. With residential valuations now being considerably attractive, this segment has started gaining traction in pockets as well,” says Maggu.

Santhosh Kumar, Vice Chairman, ANAROCK Property Consultants, says, “The Indian residential real estate market is seeing a gradual, but strong resurgence as the doubts that plagued the sector in the past are being alleviated by decisive policy reforms. With RERA in place, the danger of major project delays has been reduced drastically, as has the risk of developers not delivering on the promised quality. Also, the supply pipeline has moderated as developers have become cautious about launching new projects, and the unified tax environment under GST provides more certainty and comfort to investors. Meanwhile, commercial real estate has remained a strong investment bet in India and is drawing considerable interest, especially for Grade A buildings with a high environmental sustainability quotient.”

Factors to look at while investing in property

Whatever be the case, there are some factors which must be looked at while considering realty – both residential and commercial – as an investment compared to buying house for one’s own needs.

Industry experts say that in both residential and commercial real estate, the basic fundamental of ‘location, location, location’ applies. It is important to understand the critical interplay of the both these asset classes with each other — employment generation drives demand in both of them, and the existence of one automatically generates demand for the other.

However, “unlike residential, investment in commercial real estate is not so much about capital appreciation as about rental yields – which is the case of offices where rental yields are a lot higher than in residential. Commercial spaces – at least the ones that can best fulfil one’s investment objective of profitability – also call for much higher capital investments. This will change once the first REIT listings are announced, as smaller investors will then be able to partake of the commercial office growth story,” says Kumar.

However, buying a house for one’s own needs should not be approached with an investor mindset at all. An investor may buy a flat in an upcoming area which will eventually have good infrastructure support and can afford to wait until that happens. An end-user, however, needs to be able to use the property right off the bat and cannot wait until the area becomes more livable.

Moreover, “while the basic principles of investment remain the same irrespective of the sector, however, an investor in Indian real estate needs to be mindful of the dynamic environment of changing government policies, increasing interest rates and market valuations which make it extremely important for an investor to choose the right property in order to ensure that his investment yields the expected return,” informs Maggu.

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