Real estate ownerships are now transitioning from need-based to aspiration based
For retail investors, nothing can be truer than the advice: Don't put all your eggs in one basket. The adage simply means that investments need to be diversified to cut losses, which then begs the question as to what are the different baskets available to invest in.
In the Indian context, retail investors have the following broad variety of asset classes to choose from, namely: stocks, debt, and bullion, which in turn house a host of sub-groups such as Mutual Funds (MFs) to portfolio management services (PMS) and Non-Convertible Debentures (NCDs) to gold and fixed deposits. And then there's real estate. However, the participation of retail investors is on the rise across assets class, thanks to rising income levels, a start-up-led wealth generation (Sachin Bansal subscribing to Altico’s NCD), increasing returns of NRI’s. For instance, according to Prime Database, the shareholding of retail investors in 1,605 listed companies hit an 11-year high of 7.01 per cent during the last year.
Real estate is also a favourite asset class to consider for young affluent, first-generation entrepreneurs and start-up founders. And why not, for years, real estate has outperformed all other asset classes in one way or another, thanks to their tangible nature, steady income, stable returns, and collateral worth. The introduction of real estate investment trusts, or REITs, served as another layer to what had already become one of the most sought-after pies among retail investors.
But a string of policy as well global changes over the last few years have changed the course for the sector, with retail investors who once made up a fifth of all the buying activity making way for end-users to drive sales. With 2020 now a memory, there's fresh hope of renewed interest from retail investors to drive the sector to the glory of the old days.
A quick analysis shows that most retail investors have higher confidence in real estate compared to other asset classes and it is perceived as a safe investment. However, the cost of investment is huge and the time spent in earning the returns is long and the cost-benefit debatable. Advocates of the real estate industry are pining for innovation of new products, akin to REITs, to make the asset class attractive and also offer the same ease provided by tools like MFs. But unlike MFs which give access to the full umbrella of equities to retail investors, REITs are limited in their size, scope and the returns are limited given the fact that rental income does not offer windfall gains after factoring in the already high cost of the property.
The question now is: what's next?
Industry watchers agree on one thing. That there needs to be an avenue to give retail investors returns similar to those of developers. The real estate market should offer investable opportunities for the average investor, whose participation is key to growing the size and depth of the market.
Moreover, real estate ownerships now transitioning from need-based to aspiration based and in this phase, while most want to enjoy returns of realty, few want to go through the hassle of owning, managing, and exiting realty - especially with so many leakages like taxes involved. High net-worth individuals, or HNIs, on the other hand, have traditionally had a huge share in this segment. A September 2020 study by JLL noted that 26 per cent of all Indian HNI investments were in real estate and 67 per cent of HNIs had invested in office space.
Real estate has been one of the oldest and preferred investment avenues for this investor segment, according to a report by JLL, India. In India, real estate is preferred due to its tangible nature, stable income, steady returns, and collateral value. These investments have undergone a transition over the last decade, the report shows.
Before the pandemic arrived, commercial real estate, especially office space, was consecutively doing better year-on-year and offered steady rental income and high demand. However, work from home rules has acted as a speed breaker and slowed down the speed for the time being. As far as investment in commercial real estate is concerned, unlike HNIs, individual or retail investors do not have the leverage or access to big-ticket deals.
The average retail investor currently has to either invest directly in an under-construction project or a ready-to-move site and then wait for the prices to appreciate before booking profit. With the slowdown brought about by the 2016 note ban, the market disruption caused by the 2017 introduction of the goods and services tax and now the pandemic, gains have all but evaporated.
Under-construction plays should be restricted to projects by strong national or local players with proven execution capabilities, according to a note by Anarock Property Consultants. Ideally, the identified project should be due for completion in 6-18 months, it said.
Identifying properties for investment can be easier said than done, as location kicks into play. While luxury properties are a no-brainer in terms of investment appreciation, there's the question of affordability. While there are many low-budget properties to choose from, those need careful examination before investing.
With so many ifs and buts, real estate tends to become a cost-intensive asset class not just for developers, but also the investor, and the retail investor to be specific. While developers cannot lower price properties below the circle rates, retail investors cannot afford to exit under-construction projects, which have come under greater scrutiny of loss-weary buyers. That is because despite the Real Estate Regulatory Authority's assurance, projects are still liable to get stuck and grievance resolutions can take a long time.
After all, is said and done, real estate is certainly an asset class to consider—less volatile, low risk, a decent return, and providing greater diversification. Having said that, the sector is in the dire need of a new gateway for retail investors willing to invest in real estate.
The author is the Founder of TRU Realty
DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.