Time to get real about prospects of re­alty

HT Estates - - FRONT PAGE - Priya Sun­der let­[email protected]­dus­tan­times.com The author is di­rec­tor and co-founder of PeakAl­pha In­vest­ments

In­dia’s prop­erty mar­ket is fun­da­men­tally flawed. It is un­usual in any part of the world that one would bor­row at 10-12% and­will­ingly ac­cept a yield of 2%, on an as­set where cap­i­tal ap­pre­ci­a­tion is mar­ginal or non-ex­is­tent.

Why is the real es­tate mar­ket so out of kil­ter? The im­bal­ance be­tween in­vest­ment and re­turn can be squarely at­trib­uted to the large par­al­lel econ­omy in the real es­tate mar­ket. Larger the vol­ume of black money, higher the cost of real es­tate.

There are three con­stituen­cies who par­tic­i­pate on the de­mand side of this mar­ket. The first is those who buy prop­erty be­cause they need a place to live. This group is the most au­then­tic, nat­u­ral mar­ket. A larger pro­por­tion of this group will en­sure a long-term, sus­tain­able growth.

The sec­ond is those who buy prop­erty to rent. Peo­ple have sur­plus cash, and like their in­vest­ments in other as­set classes, they in­vest part of this sur­plus in prop­erty. They hope to de­rive a rental yield, or per­haps sell the prop­erty for cap­i­tal ap­pre­ci­a­tion. With­out plac­ing big bets on cap­i­tal ap­pre­ci­a­tion, ro­bust rental yields are an in­di­ca­tion of a de­vel­oped prop­erty mar­ket. In most parts of the world, the buy-to-let mar­ket is a sig­nif­i­cant part of the over­all prop­erty mar­ket be­cause of its healthy re­turns.

The third con­stituent com­prises of peo­ple who have sur­plus cash that they can’t fully ac­count for. It’s not easy to de­ploy such money into fi­nan­cial mar­kets be­cause it leaves a long trail. That money his­tori- cally, and even to­day, finds its way into gold or prop­erty. The buy­ers wanted an av­enue to route black money to avoid scru­tiny. For the long­est time, no ques­tions were asked. Many builders used this money to set­tle pay­ments to­wards the un­or­gan­ised sec­tor suchaslabour­ers, con­trac­tors, some­times even mafia.

Asare­sult, peo­ple whobought prop­erty with such con­cealed cash did not ex­pect anyre­turn on in­vest­ment. Their be­hav­iour was akin to hid­ing money un­der a mat­tress. The prop­erty could even be locked for decades to avoid te­nancy has­sles. Even when it was rented, they were happy with a triv­ial rent, and that is the rea­son to­day’s rental mar­ket is con­tent with a 2-3% yield.

The NDA govern­ment’s thrust on elim­i­nat­ing black money re­sulted in de­mon­eti­sa­tion, post which a large amount of un­ac­counted cash found its way into banks. We see that as the pres­sure on the par­al­lel econ­omy in­creases, reg­u­la­tions strengthen and RERA grows teeth, each prop­erty trans­ac­tion will be­come track­able and trace­able. This will re­sult in more builders be­com­ing or­gan­ised and pro­fes­sional, even­tu­ally lead­ing to the de­cline of black money in this sec­tor.

Ev­ery mar­ket op­er­ates on the prin­ci­ple of de­mand and sup­ply. In the real es­tate mar­ket to­day, there is ex­cess sup­ply and low de­mand. With the tight­en­ing around reg­u­la­tion and com­pli­ance, the cash com­po­nent of the real es­tate mar­ket has shrunk, re­sult­ing in dwin­dling de­mand. Also, peo­ple who bought prop­erty to sell find that they are hav­ing to sell at a loss. To avoid the loss, they post­pone the sale, thereby min­imis­ing real es­tate trans­ac­tions.

When de­mand starts to shrink, there will be pric­ing pres­sure. Prices must fall and re­set to re­ac­ti­vate the mar­ket. A new equi­lib­rium must be es­tab- lished for the mar­ket to sta­bilise. When this new price level is reached, the cost to ac­quire prop­erty will be less, trans­lat­ing to higher rental yields.

What does all this mean for some­one who owns a prop­erty an­dis look­ing to sell; for a ten­ant; or for some­onein­ter­ested in buy­ing real es­tate to­day?

From an owner’s per­spec­tive, you may find your­self in a sit­u­a­tion where you are un­able to sell your prop­erty even at cost. You can ei­ther hold on the prop­erty and hope that prices in­crease in fu­ture, or you can choose to sell at a lower price to­day, in­vest the pro­ceeds in an­other as­set that grows faster and re­cover your loss.

If you’re a ten­ant and not ap­proach­ing re­tire­ment any­time soon, it may be a good idea to con­tinue rent­ing. If rent­ing prop­erty is not such a great deal for a land­lord, it is agreat deal for a ten­ant. You can live in a ₹ 1 crore prop­erty by pay­ing rent at 2-3% of its value. Not own­ing a prop­erty gives you the great­est flex­i­bil­ity in terms of job changes or lo­ca­tion changes. How­ever, if you’re ap­proach­ing re­tire­ment and don’t want to deal with the un­cer­tainty of liv­ing in a rented prop­erty, you can buy prop­erty pro­vided it doesn’t af­fect your fi­nan­cial in­de­pen­dence.

As an in­vestor, you are aware that the prop­erty mar­ket is not likely to go through the roof any­time soon.

Un­less you find dis­tress sales, it maynot­be­worth­par­tic­i­pat­ing now­be­causey­ouwould­be­bet­ter off in­vest­ing in other as­set classes that have a faster rate of growth.


Ro­bust rental yields in­di­cate a de­vel­oped prop­erty mar­ket

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