What is the economics of real estate investing in India?

At the start of 2021, the real estate industry has a lot to mull over. Companies are grappling with work-from-home policies and the role of the modern office. Investors are contending with not only a global economic downturn, but the sweeping cultural shifts influencing how we shop, work and spend our free time.

As results from the great work-from-home experiment of 2020 are trickling in, one thing is clear: greater flexibility is set to remain. This means offices need to be redesigned to meet new working patterns, while the concept of the “near office” – satellite offices close to where people live – is also on the ascendency.

Real Estate: Definition, Types, How the Industry Works
Source: The Balance
Amidst all this, the common man’s query is – Is it safe to step into real estate?

How investors refocus during an economic downturn is always closely watched. In 2021, a cautious-but-confident approach is expected to continue, supporting demand for premium office buildings in big cities. There has also been a shift toward sectors that became increasingly important during the health crisis. Logistics assets, already one of the hottest sectors in recent years, are set to receive increased allocations amid the boom in online shopping. Data centres, multifamily and life sciences real estate are also increasingly in investors’ crosshairs.

With migration as the core idea behind job search in bigger cities, the real estate has boomed in the last 2 decades and is likely to grow in the coming years as well. People are ready to invest in small flats with dual purpose i.e., to live and to do investment. So, keeping that in mind, the demand is growing rapidly, and it is expected to rise till 2025. So yes, scope for demand makes it a profitable business with many players. 

Why Invest in Real Estate?

Rich and wealthy invest in real estate directly. They own multiple residential or commercial properties. Steady and decent capital appreciation of their real estate property is common. But the part which makes property investment so dear is its capability of generating stable short-term income. The short-term income is generated in form of “rental income “. 

The rate at which the rental income grows, generally beats inflation in long term. This is especially true for Metro, Tier1, and Tier 2 Cities. As the monthly yield of property grows, this also pushes the overall property price up.

5 Reasons To Invest In Northern Michigan Real Estate
Source: northern michigan escapes

The rental yield (fixed income) grows with time. Typically, this growth keeps pace with the inflation. Capital appreciation will happen due to demand growth. India being a growing and young population, demand for property keeps rising. This dual effect (of assured rent and value growth) makes the real estate sector generate unparalleled returns, unlike any other asset. Property investment is one of the best inflation hedge.

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How can you invest in Real Estate?

There are two categories of buyers, one is those who are end-users of property and the other are those who invest to earn rent or resale the property to generate revenue and multiply money. 

Any real estate purchase beyond your first one – a place that you call home – becomes an investment. Understand and analyse your purpose and then invest accordingly.

1. Buying a property and putting it up on rent

Real estate investing through buying a property has been lucrative and a fruitful investment model. However, this model requires a lot of patience and more importantly, availability of cash. An investor should only turn towards real estate for investment purposes when they have no debt, a solid emergency fund, and are looking to fatten up a retirement account. This is because real estate is the most illiquid asset class and will not be able to help during any emergency.

While it is easy to presume that the only way to invest in real estate is through direct property ownership, the fact is that there are many other options that offer lucrative and steady cash flow without the need to buy a property.

2. Real Estate Investment Trusts (REIT)

Real Estate Investment Trust is a specialised company which makes debt and equity investments in commercial real estate. Like a mutual fund, REIT investors hold shares of the REIT and earn returns in the form of dividends, depending upon the performance of the REIT investments.  

Government stipulations in India will limit 80% of each REIT to commercial properties. A recent article in Forbes pointed out that the rate of returns for Indian commercial projects averages a mere 7-8%, roughly the same as bank deposits. After figuring in property appreciation, the expected annual yield of a REIT would be approximately 11-12%. However, since most of their capital is in rented commercial property, the primary risk is that of vacancy and lack of rent appreciation. These can depress returns in time of excess commercial property inventory. 

3. Real estate wholesaling

Real estate wholesaling is a good way for individuals to break into the real estate industry. This allows investing without a huge amount to get started. It is a form of property-flipping wherein the investor, also called as the wholesaler, enters into an agreement to buy a property that they believe is under-priced. The property is then sold to the end-user at a profit. The process helps a beginner to gain insight into the real estate market and learn invaluable negotiation skills. The wholesaler earns revenue in the form of a fee that is attached to the transaction, usually a certain percentage of the overall property cost.

5. Real Estate Mutual Funds

Investing in real estate mutual funds is a great way to diversify your real estate portfolio. The concept is like a mutual fund wherein; the investor owns a portion of the mutual fund while the company itself owns the investment that it makes. The earnings are in the form of a dividend or a certain amount of share appreciation. Real estate mutual funds primarily invest in REITs, real estate stocks, and direct purchases of residential, commercial, and industrial units. The option is majorly favourable to small investors who are unwilling to invest in real estate directly. An important point to consider here is that the earnings from real estate mutual funds depend on several factors. They could be demand and supply demographics, market conditions, and interest rates. 

Property Investment: How To Invest In Real Estate In India For Beginners? -  Getmoneyrich

Real estate investments do not necessarily involve property ownership. As a matter of fact, there are plenty of other opportunities that allow the investors to reap the benefits of real estate appreciation. This happens without the need to shoulder the ongoing responsibilities of building maintenance. Investors who chose to invest beyond the traditional sense have various options. Like to invest across multiple locations and property sizes along with different classes of real estate. While these may serve as predecessors to future property-owning, you may also find the returns from these investments compelling enough to avoid buying a property altogether.

Source – JLL and Financial Express

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