Real Estate: The Real Deal
The Indian real estate market has been ever growing despite facing a few major bumps along the way, one can say that this success is due to the strong foundation build during the early 1960s when the market worked more on human sentiment than it did on science. Since the industry has made massive strides starting with the government making it easy for common people to secure house loans which in turn led to a housing revolution in India, thus providing a definitive shift to the market.
The market got renewed attention once from 2004 where investments started coming in from various groups of investors hence creating an asset bubble which based on speculative investment. The result of this was the market started taking a dip and the once booming market perished away slowly.
The market came under pressure once more during 2010 especially in the northern part of the country which continued till 2016 until the Parliament passed the Real Estate Regulation Act (RERA) bill in March 2016. Through RERA, the government tried to bring in as much transparency as possible to help the general masses in property buying and selling. Builders were asked to upload all the details of their projects directly on the RERA website. Soon RERA was followed by the Benami Property Act 2017 — an effort on the government’s part to bring down the number of fictitious properties and illegal transactions as much as possible.
The middle of 2017 saw the introduction of the Goods & Services Tax (GST) — a path-breaking initiative by the government to simplify the Indian tax structure and increase transparency in the property purchase process for buyers
The Indian real estate sector is second largest employer after agriculture which is the primary occupation of many households in India. It consists of four major sub divisions: housing, retail, commercial and hospitals. Coming to market size of the Indian real estate, it is expected that the real estate sector will be reaching a market size of US $1 Trillion dollars by 2030 after reaching $120 billion dollars in 2017 and contribute to 13% of the country’s GDP by 2025.
Office space has been driven mostly by growth in ITeS/IT, BFSI, consulting and manufacturing sectors. During 2019, the office leasing space reached 60.6 msf across eight major cities, registering a growth of 27 %y-o-y. In 2019, office sector demand with commercial leasing activity reached 69.4 msf. Co-working space across top seven cities increased to reach 12 sq ft by end of 2019.
Warehousing space is expected to reach 247 msf in 2020 and see investment worth Rs 50,000 crore (US$ 7.76 billion) during 2018–20. Grade-A office space absorption is expected to cross 700 msf by 2022, with Delhi-NCR contributing the most to this demand.
Housing sales reached 2.61 lakh units in 2019 across seven major cities.
Due to the high demand for office as well as residential space the real estate sector has attracted many huge investments which aggregate to about US $6026 Billion. Institutional investment in the sector stood at US$ 712 million during the quarter ended March 2020. Real estate attracted around US$ 14 billion from foreign PE between 2015 and Q32019.
Export from SEZs reached Rs 7.01 lakh crore (US$ 100.30 billion) in FY19 and grew by almost 14.5% to Rs 3.82 lakh crore (US$ 54.66 billion) in H1FY20.
Some of the major investments and developments in this sector are as follows:
- In March 2020, the Government approved proposals from TCS and DLF to set up SEZs for IT sector in Haryana and Uttar Pradesh.
- Blackstone crossed US$ 12 billion investment milestone in India.
- Puravankara Ltd, a realty firm, plans to invest around Rs 850 crore (US$ 121.6 million) over the next four years to develop three ultra-luxury residential projects in Bengaluru, Chennai and Mumbai.
- First REIT, which raised Rs 4,750 crore (US$ 679.64 million), was launched in the early 2019 by global investment firm Blackstone and realty firm Embassy group.
- In January 2020, RMZ Corp entered into a strategic and equal partnership with Mitsui Fudosan (Asia) Pte Ltd to expand its business footprint.
- Housing sales reached 2.61 lakh units in 2019 across seven major cities.
- In September 2018, Embassy Office Parks announced that it would raise around Rs 52 billion (US$ 775.66 million) through India’s first Real Estate Investment Trust (REIT) listing.
Apart from the private enterprises which are investing a huge amount into this sector and foreign direct investments (FDIs) the government is also doing its part by taking several new projects and revived some old ones-
- In order to revive around 1,600 stalled housing projects across top cities in the country, the Union Cabinet has approved the setting up of Rs 25,000 crore (US$ 3.58 billion) alternative investment fund (AIF).
- Under Pradhan Mantri Awas Yojana (Urban) (PMAY (U)), 1.12 crore houses have been sanctioned in urban areas, creating 1.20 crore jobs.
- Government has created an Affordable Housing Fund (AHF) in the National Housing Bank (NHB) with an initial corpus of Rs 10,000 crore (US$ 1.43 billion) using priority sector lending short fall of banks/financial institutions for micro financing of the HFCs.
- On February 29, 2020, India formally approved 417 special economic zones (SEZs), of which 238 were already in operation. Majority of the SEZs are in the IT/ ITeS sector.
As we know there many other sectors apart from real estate where one can invest such stocks, mutual funds, etc .So the question is why should one invest in real estate where the return comes after a certain period of waiting where as, stocks being a liquid asset can be easily sold off. Let’s compare investing in both stocks and real estate-
1. It is important to note that that the price of stocks can increase quickly than real estate, over long period of time the S&P 500 index has produced returns of 9–10% where as the real estate sector tend to only outpace inflation but not by much.
2. The average home price after accounting for inflation has risen by just 1.5% per year whereas the returns in stock have risen to 7% per year , i.e stock market has been able to generate returns more than 4 times as compared to the rate of real estate appreciation.
Even though the above reasons show that real estate has lower returns but still it has stronger return potential as compared to stocks because-
1. In the stock market one cannot simply borrow money from others and invest as it is considered irresponsible but when it comes to the real estate market one can use significant amount of financing without adding any unnecessary risk. Lenders typically finance investment properties with down payments of just 20–25% of the sale price. When investing in a primary home, the down payment requirements can be significantly lower .
2. The second reason why investing in real estate can produce strong returns is that investment properties can be rented out to generate passive income. Renting out investment properties is one of the best ways to earn passive income in real estate.
3. Real estate investors enjoy tax advantages that stock investors don’t. For example, when you buy an investment property, you get to write off the purchase price over a certain number of years — a tax deduction known as depreciation. It would be quite amazing if you could write off your stock investment in a similar manner, but that isn’t the case.
4. Finally, Real estate investment trusts, or REITs, get an extra tax benefit in that they avoid corporate taxes by paying out most of their income as dividends. These are easy for investors to buy in an IRA or other tax-advantaged retirement account, meaning they can avoid dividend and capital gains taxes altogether.
Now we to further compare we can see how real estate investment trusts have performed over time as compared to stocks
One should know that the above provided data isn’t conclusive as there are other modes of investment in real estate apart from REITs but it does show the long term return potential ability of real estate market
Hence to conclude we can say that it is difficult to make an exact comparison of the return potential of real estate with stock market. But it would be justified to say that real estate almost has the same return potential as stocks if not more and there is possibility of good long term investments in real estate market. Apart from stocks itself the data provided shows that real estate market will go only up in the coming years and with the initiatives that are being taken up the government it will act as the boost that is required for upliftment of the sector along with giving other investors confidence to invest their wealth into it. Real estate as a whole may seem lucrative from the outside but one has to be careful as the market has some disadvantages which if are in effect at the time can lead to serious loss of the investor.
