During uncertain and turbulent times, the one place that offers comfort and safety is ‘home’. With job losses and economic upheaval, paying rental for homes suddenly became a financial burden. Home loan borrowers on the other hand had an option to avail EMI moratorium making it beneficial over rental payouts.
It’s not about just the Covid pandemic, for real estate is considered to be a stable asset class and a preferred investment option especially in a volatile market scenario. The Reserve Bank of India’s House Price Index tracking home prices in 10 major cities puts the average return from real estate in the last 10 years at 11.6% per year. This exceeds the return offered by the equity market at 11% as well as Gold offering a return of 8.8 % over the last 10 years.
Real estate and its strong fundamentals
Just like any other investment, what drives real growth are strong fundamentals, and real estate is no exception. Niti Aayog figures estimate a current housing shortage of nearly 25 million, showcasing the vast underlying demand. Increasing urbanization, growing incomes (except in 2020), and large middle-class households – all combine to drive demand in the sector.
In fact, Niti Aayog estimates the Indian real estate sector to reach $650 billion by 2040 from the current levels of $120 billion. Since real estate is mostly a long-term investment, any cyclical downturn does not impact the investment as much compared to other asset classes.
Subdued real estate prices: A good buying opportunity
The one investment fundamental every advisor swears buy is “buy low, sell high”. With realty prices dropping, real estate today offers a smart investment option. For example, a recent Knight Frank India report reveals that real estate prices corrected in Delhi NCR, Pune, and Chennai by more than 5% in the first half of 2020.
Such corrections are opening up buying opportunities as shown by price growth of 6.9% and 3.3% in the markets of Hyderabad and Bengaluru during the same period. This growth is also promoted by buyers looking at price correction as an opportunity to upgrade to a bigger home in the suburbs away from congested city centers.
Being a buyer’s market, not only are the prices low but there are ample discounts on offer as builders look to sell unsold inventory. Add to it enablers like RBI’s reduction of repo rate to 4% bringing down home loan interest rates to almost 7% levels, the extension of benefits under Section 80EEA till March 2021, and reduction in stamp duty rates by various states.
Due diligence: The time-tested mantra for real estate investments
Just like every investment asset class, real estate comes with its pros and cons. The biggest factor in real estate investments is the need for proper due diligence, as not all properties in all locations may offer similar returns. For example, as per RBI’s India House Price Index from June 2010 to June 2020, real estate in Lucknow offered returns of 16.1% per annum compared to only 6.1% for Jaipur.
Apart from location and the city, opting for ready-to-move-in properties is by and large a safer bet than under construction properties or land acquisition. Price dips have made ready-to-move-in properties budget-friendly with sweeteners like complimentary car parking space, pre-EMI payments by builders, etc. Also do not let the discount be the sole criteria-reputation and track record of builders should remain one of the fundamental criteria when investing in real estate.
Real estate can be a great tangible investment option, especially in the long term. The current price dip, low interest rates, and stamp duty cuts all make it a viable option albeit with some strong fundamental research required before purchasing.
(By Hemanth Gorur, Founder, HerMoneyTalks)