Fair valuations, rising prices augur well for realty sector returns

Select locations well connected to economic hubs, avoid over-leveraging

Housing prices across India’s top eight cities rose, on an average, by 8 per cent year-on-year in the first quarter of 2023. Six of these markets experienced double-digit price growth, with the highest increases observed in Delhi-National Capital Region (16 per cent), Kolkata (15 per cent), and Bengaluru (14 per cent), according to a recent report by CREDAI, Colliers India and Liases Foras.

Demand amid high loan rates

Prices stagnated across the country from 2015-16 and witnessed a correction during the Covid-19 pandemic. “These developments reshaped the relationship between property prices and purchasing power, thereby enhancing affordability. In India, which has considerable housing shortage, such conditions typically spur demand,” says Pankaj Kapoor, founder and managing director, Liases Foras.

The real estate market started rebounding from the latter half of 2021. According to Vimal Nadar, head of research, Colliers India, “A significant portion of the sales growth during this period can be ascribed to the release of pent-up demand from 2020 and the first half of 2021, due to the pandemic.” Nadar also points out that the sustained sales momentum thereafter was owing to the desire for homeownership that intensified during the pandemic.

Over the past two to three years, developers have come up with offerings that are in sync with buyers’ needs. “There has been an enhanced focus on launching and delivering properties that closely align with market needs in terms of location, price, timing, and configuration,” adds Nadar.

A good time for entry

The market has only recently emerged from a lengthy period of stagnation and correction. “A considerable price correction appears unlikely at this juncture. A rising trend in property prices seems more probable,” says Kapoor. He believes the current price levels are “productive”, implying that prices have not yet reached levels that could hinder further gains. He anticipates that economic activity, infrastructure developments (leading to reduced travel time to emerging locations), and inflation will continue to propel price growth.

Concentration and other risks

An investment in residential real estate often carries concentration risk for retail investors as they usually don’t have enough money to diversify across properties.

Says Vishal Dhawan, chief financial planner at Plan Ahead Wealth Advisors: “Real estate investments involve substantial additional costs — such as stamp duty, registration charges, and society charges — which increase the breakeven point.”

During a downturn, housing becomes an illiquid asset class, and exiting it proves challenging.

Essential checks for investors

Investors should begin by evaluating the rental yield of the property. “Properties with a rental yield of around 3-3.5 per cent typically have productive capital values that can lead to price growth. Conversely, if the yield falls to 1-2 per cent, it usually indicates that the price is already high.”

Location is a crucial consideration. Kapoor advises against selecting locations far from economic hubs and workplaces. He recommends choosing areas that are already inhabited and experiencing population growth. The location should also be well connected to economic hubs.

The importance of infrastructure development cannot be overstated, as it often acts as a catalyst for growth in population density, and subsequently in property prices.

Mistakes to avoid

The Delhi-NCR region still contains a number of unfinished projects, underscoring the importance of selecting a developer with the financial muscle to complete his project.

Investors also need to invest in the right property configuration (one, two or three-BHK) that is in high demand in their chosen market.

Real estate cycles are long, so investors should not get unduly influenced by recent price changes. When entering this asset class, they should have an appropriately extended investment horizon to be able to deal with short-term price fluctuations and the lumpy nature of price gains.

Overleveraging should be avoided. Says Dhawan: “The burden of interest increases the cost of ownership and makes it challenging to hold on to this asset during a market downturn.” It often forces investors to sell at depressed prices. Rising interest rates add to overleveraged borrowers’ stress.

Finally, remember that unoccupied properties can deteriorate physically over time. Moreover, investors need to pay taxes on “deemed rent” even if the property isn’t rented out.