The Reality of Real Estate Investment

Investment in real estate is unique in many ways, yet it finds a prominent place in one's investment portfolio. The slowdown/ recession in the economy is set to take a heavy toll of the real estate sector. Owing to tighter credit and a steep decline in demand, CAPEX announcements of the sector plummeted 82% between the first and the Q3 of the current fiscal. The self owned property used for one's own occupation may not be effected by the recession because the loss, if any, in its value will only be notional, as the intention of the owner is not to sell it. However, when we invest in a second property its valuation becomes important.

The real estate sector in India is important for more than one reason. Its direct impact on the people is because it forms a part of the basic needs of human beings namely 'Roti, Kapda aur Makan', and provides direct employment to a large number of people. The sector has indirect demand implications for construction and transportation industry and sectors like steel and cement. The slowdown in real estate sector has adverse implications for the economic growth of the country. The govt. is trying its best to stimulate demand for the real estate sector.

The mantra to revive the realty sector is provision for 'Affordable Housing'. Most of the builders in the recent past had relied on upper income class, NRI's and foreigners to salvage their operations. The going was good till such time liquidity was sufficient to fuel growth, the clock has turned full circle since. Imagine, if you had purchased a small 2 bedroom house in Delhi or Mumbai for Rs.50 lacs in the recent boom, and were able to rent it out for Rs.15000 per month, the annualised return would be a paltry 3%. With the cost of Home loans in the range of 9-10% p.a., you would be losing money even if the tax breaks are taken into consideration. In a recently conducted survey it has been revealed that more than 50% of the home buyers are looking to buy a 2 BR apartment in the Rs.5-10 lac range.

The RBI on its part has reduced the reference rate (REPO rate) by 3.5% in the past 4 months but the banks have reduced their PLR's by 0.5-1% only. The builders on their part have been shying away from offering low cost houses, because the margins are low here. This has created a huge Demand and Supply mismatch. Speculators have almost quit the real estate market, but their is no dearth of genuine buyers. According to an Assocham study “Reality check on Real Estate”, India has a housing shortage of about 19.4 million units. To lure genuine buyers to invest in real estate, prices will have to move southwards till such time the rental values catch up with the rate of return on investment. The real estate prices tend to follow a lag effect: They are likely to correct anywhere between 20-50% over the next one year before genuine buyers return to the market. The sooner this reality dawns on the Realtors the better!