how lucrative is Real-estate as an Alternative Asset Class
Once considered the most popular asset class, real estate is now being questioned for its attractiveness due to an extremely buoyant equity market in the last 3-4 years. Dipali Gandhi, Head of Research, ASK Property Investment Advisors explains.
Real estate has traditionally been one of the most attractive asset-class for Indians for a variety of reasons including high returns, parking of black money, tax sops on investment, passing on as inheritance, financial status, diversification in portfolio allocation etc. Moreover, it was also preferred by many due to its physical and less volatile nature compared to equity, despite it being illiquid. However, due to stagnancy in real estate prices since the global financial crisis and a spate of transformational reforms announced in the last 2 years like the introduction of RERA, levy of GST, Benami Property Act, removal of tax sops and most importantly demonetisation have led to a considerable reduction in demand especially the one led by investors. There have been instances of investors struggling to exit their investments who had invested in micro markets, mainly based on infrastructure announcements like Dwarka Expressway in NCR, Panvel and beyond in Mumbai etc.
alternative investment funds (aifs) Investors can opt for investing in real estate focussed Alternative Investment Funds (AIFS) that have access to the profits and cash flows of the project and are not really dependent on price escalation in future. One can diversify risk as funds invest in multiple projects across geographies. Not only do the AIFS enable financial closure of the project, they also control the project cash flows and focus on completion and sales, which in turn enables them to exit in a timely manner. As these AIFS structured finance to developers with an equity kicker, investors can be assured of preservation of capital with regular returns through periodic payments and can also enjoy surplus from the project. However, one should thoroughly evaluate credentials of the sponsor, management, strategy, performance track record, risk management framework, asset management focus etc.
looking forward The fundamental demand for housing will continue to remain intact, as home ownership will always be a priority aspiration for all Indians. Home buyer confidence which was completely shaken due to completion risk and affordability, will gradually revive due to a combination of improvement in macro economic conditions, job creation, reduced interest rates which are now at a multi-year low and ever increasing access to housing finance. Most importantly, the Government’s thrust on affordable housing segment with the initiative of “Housing for All by 2020,” promises a positive outlook for the sector. The strong macro and positive impact of the policy reforms have created a conducive environment for resurgence of the real estate market. In fact, the market recovery this time round, will be more sustainable, backed by regulations. It would continue to be a lucrative asset class but only for investors with a long term horizon, as the era of generating short terms gains is now behind us!
With a gradual demand revival, prices will appreciate but the pace will be much slower, given the considerably high inventory levels. One should invest in real estate only with a long term horizon.