Since time immemorial, apna ghar (our own home) is a dream cherished by several Indians. More than a need for a roof over one’s head, owning a home is an integral part of our culture; something similar to education or marriage. Apart from self-use, over the last two decades, real estate gradually evolved as a prominent asset class for investment. Many investors took the plunge in the market in order to broaden their portfolio.
In Tier II and III cities, owning a home or a property is a strong indicator of a person’s social standing. With increasing avenues of employment in the smaller towns and cities, people these days are utilising their properties that were lying dormant all this while for monetary gains.
The importance of real estate in India can also be gauged by the fact that the Indian judicial system is clogged by property disputes. A study conducted by an NGO (Daksh) in 2016, that analyses the performance of the judiciary, revealed that a whopping 66 per cent of cases studied were related to property litigation.
Cut to 2017. Today, due to several macroeconomic factors, discussions as to why investing in real estate is no more profitable are doing the rounds. While a few opine that stocks and fixed deposits fetch better returns, there are a few who have gone to extent of saying that the crash of the Indian real estate market is almost inevitable. There is a feeling of a palpable sense of emergency and exasperation in the market.
How Did We Reach This Situation?
Over the last decade, Indian metropolitan cities have developed way beyond their capacity with a frenzy of construction. With the constant demand for housing, the concrete mixers just never stopped churning homes after homes. Satellite cities that were supposed to be the solution for crowded main city looks like a painting depicting an aftermath of a curfew. Tall buildings with no occupants, or let’s just called them ghost cities for the sake of simplicity, dominate these cities’ spectrum.
The rising level of unsold inventory in Indian real estate market is scary. This situation further worsened with the surgical strike against black money last year. Post-demonetisation, the sales volume of apartments reduced drastically. As per the market reports, property values declined too. While the scope of negotiation for buyers definitely widened during this phase, there were a few sellers who resorted to anchoring.
Beginning of Acche Din?
Buyers’ Market: Interestingly, post-demonetisation, speculative investors that formed a major chunk of Indian realty sector went either in hibernation or just resorted to other asset classes like the stock market or mutual funds. This, in a way, paved way for it to become a buyers’ market.
Transparency: With revolutionary reforms like RERA and GST, the anomalies plaguing the real estate sector are likely to reduce in the times to come. It wouldn’t be wrong to say that these reforms have reinstated the faith of buyers in the realty market. This can be gauged by the fact that the vacant inventory is reducing, sales volume is gradually picking up the pace, developers are focusing on completing their existing projects, and property prices are also showing signs of revival. In all, the situation does seem to be getting back on track.
Improving Infra: Not to mention, the infrastructure of our cities is also improving constantly. The enhanced connectivity via metro rail and improving road infrastructure are boding well for the realty sector. This year’s budget granted the largest-ever allocation to rural housing and improvement of road networks. Enhancement of airports in Tier II cities and increasing the allocation for metro projects across the country are likely to be instrumental in planned growth of the cities.
Budgetary Reforms: One needs to give it to the current government for realising the importance that real estate holds in the country. The accordance of Infrastructure status to the affordable housing was a great move that is expected to act as a catalyst in achieving the dream of Housing for All by 2022. Other initiatives include refining the area definition for affordable homes from a built-up area to carpet area, thus increasing the number of projects within its ambit.
Consumer Friendly Schemes: To encourage prospective buyers to take the plunge, the government has also announced several reforms. These include the modifications in the EPF scheme, the Credit Linked Subsidy Scheme (CLSS), reduction in the home loan interest rates, to name a few.
The market, today, indeed has become a buyers’ market.
So, Is the Situation Really Grave?
Has real estate lost its sheen to other asset classes? Well, we must understand that real estate is cyclical in nature. The dynamics are impacted by simple demand and supply logic or even by the economy in general.
Before delving further, let’s understand the real estate cycle. To begin with, it consists of four stages.
Phase 1: Popularly known as the Recovery phase, this is largely when the market gradually starts to recover from a severe downfall. At this point in time, the construction is limited and the vacant inventory declines, ultimately resulting in price rise.
Phase 2: After recovery comes the phase of Expansion. With increasing demand, the construction activity shoots up during this phase. However, demand outdoes the supply and vacant inventory continue to rise along with property values. Several investors wait for this period to garner maximum returns on their investments.
Phase 3: This phase is marked by Hyper Supply as the market at this point is very bullish. Increase in property prices coupled with heightened construction activity, many investors look to park their money in the property market. While the demand may reduce during this phase, the supply cannot be cut off immediately due to active construction activity. This results in a demand-supply mismatch.
Phase 4: Last in the cycle comes the Recession where the demand for housing continues to decline and the vacancy levels go up. This is when developers face a cash crunch and property values start to decline further. While this phase is not conducive for investors to make any move, it provides end-users with a plethora of options at better prices.
This said, there are a number of factors that impact the real estate cycle. If we have to go by market research, it takes about 18 years for the real estate cycle to complete in the US and Europe. Now, considering the year 1991 when the Indian economy started to catch pace, at present, we should be somewhere in the middle of the second real estate cycle.
A Major Problem!
All this boil down to one question – if the demand is high in the market, why is that the unsold inventory is still mounting? Well, this is because there is a dearth of the ‘right’ product. Over the last few years, developers have just been launching projects left, right and centre without giving much heed to what is really needed. Also, it has been observed that developers tend to follow the herd when it comes to launching projects.
It is high time that developers start taking a cue from what buyers want and give them a more suited product. Real time data and analytics can solve half the problem.
Why Real Estate Will Flourish in The Country?
At present, the market may be under-performing but real estate is one thing that will never become non-lucrative in the Indian context. Here’s why.
- Not just the middle-class, the major portion of the NRIs, HNIs and UHNIs portfolio comprises of real estate. It is bound to remain like that as property in India is something that keeps NRIs connected with their Indian roots.
- The demand for housing is just going to grow in the coming years. India’s population is anticipated to outgrow China’s population by 2050. So, clearly, the demand for housing is perennial.
- Moreover, with several MNCs setting foot in the country, the demand for commercial real estate is also expected to grow by leaps and bound.
- Lastly, it will be imprudent to ignore the sweet connections of our bureaucrats with real estate.
The Times They Are A-Changin!
The fact that real estate has fetched higher returns in the past cannot be ignored. However, it is imperative that one must change the outlook with changing times. We are no longer living in an era where real estate investments will fetch great returns in a couple of months. This, in fact, holds true for any other asset class too.
Considering the current market scenario, property investments should be made from a long-term perspective. For those eyeing capital gain, opting for under-construction properties at the time of launch would be the best option.
Being realistic with the ROI is also important.
Growth potential of the location must be analyzed with utmost seriousness as it can have a cascading effect on the property prices. A locality with sound social and physical infrastructure, adequate public transportation, and balanced supply and demand should be taken into consideration. Remember, a location can make or break your investment.
All said and done, it is not right to say that buying a home in today’s scenario is a bad idea. As mentioned above, like all other assets, real estate too is cyclic in nature. And as they say, after a storm comes a calm. However, considering the uncertainties in the economy and the job market, it is advisable to check one’s financial stability before investing.
Always remember these lines by Franklin D. Roosevelt, “purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
Truly, cautious investment at precise time at a ‘’correct’’ location is more likely to reap you benefits in the times to come!