As with every other forms of investing, real estate investing in India is affected by a number of factors. Some of these factors have a direct and apparent effect such as rising interest rates which in turn lowers the value of property. Other factors such as changing demographics have a lesser impact affecting values of property over time. Let us talk about the Normal Cycle in the real estate business first.
The Normal Cycle
The world economy and the Indian economy has a normal cycle that rises and falls in a predictable order (though often not predictable). Every cycle has four phases namely:
As a real estate investor you need to asses which stage of the economy you are currently in so that you will be prepared for what’s coming next and thus you will be able to manage your investments in a wise manner. The above 4 factors pertain mostly to the buying and selling of real estate investments and matters less when you are holding on to your real estate investments. There are exceptions though such as: trading-based investments like real-estate stocks or REITs / Real Estate Mutual Funds / ETFs because these funds are also tied to stock market forces in addition to the factors that affect real estate.
1. The Economy
The overall state of the Indian economy will have a great impact on real estate investing but the kind of effect largely depends on the type of investment you wish to make. Generally real estate valuations will skyrocket in a vibrant economy and shrink in a slow economy. But the good news is that Real Estate Investments can thrive in any kind of economy whatever the shape it is in and sometimes your real estate investments will even thrive in a slow economy.
How Slow Economy Affects Real Estate Investments
Within the Real Estate Investment world there are different sectors and each of these are impacted in different ways by changes in the economy. Some types of investments are affected more strongly during a slowdown such as REITs and funds specialising in real estate and these funds could see big price drops. On the other hand during an economic downturn such as the one that we are seeing right now as the world economy gets battered and ravaged by the Covid-19 virus, well managed funds and investors with deep pockets are able to snap up distressed commercial and residential properties for a song and will be holding them in anticipation of the price jump when the economy inevitably comes back on track. Let us look at the specific types of real estate that tends to buckle in a slow economy. These are precisely the sectors that have been affected currently during the Coronavirus pandemic.
b. Commercial Offices
c. New Home Construction
d. Shopping Centers
e. Educational Institutions
REITs and real estate investors would be well advised to look at discounts being offered by sellers who own these properties and buy them if the price seems right. If certain sectors go down in a bleak economy then there are certain sectors which thrive. Discount stores, grocery stores and convenience stores and brands thrive in a down economy as we have seen recently as people rush to buy essential supplies and stock and hoard daily items in anticipation of worse times to come. Other recession-resistant property types include self-storage facilities and low cost affordable housing especially in the outskirts of a city. In Mumbai we have seen large swathes of white collar mid and senior level corporate employees and business folks permanently move out of the city centers into cooler, greener and more serene locations such as Karjat, Lonavala etc. where they can not only curtail their living expenditures but also work and play unimpeded as long as they have decent internet connections!
2. Interest Rates
One of the biggest drivers of the Real Estate market is interest rates. That is because interest rates can directly impact the ability to buy property. This holds true in the residential sector and is important to landlords, flippers and home investors. When interest rates are low, it costs less to take on a mortgage loan on a property which makes it more affordable for people to buy homes. More people buying homes increases demand and in turn drives up real estate prices northwards. When interest rates begin to rise up, mortgage costs go up and that makes prospective home buyers and investors think twice about buying property which in turn lowers real estate prices. This does not affect landlords though because extra mortgage costs can be passed on to the tenants in the form of rent raises.
Interest rates also affect other forms of real estate investments. Real estate investment trusts also called REITs offer steady returns. When interest rates go down, the returns look better and consecutively demand for REITs increase and subsequently their prices also increase! On the downside, when interest rates rise they can outrace the returns thus making REITs look less impressive and in turn lowers their market price. Again, these price fluctuations only matter if you are buying or selling property and not if you are just sitting back and collecting the income from your REIT investments.
Demographics matter a lot when it comes to real estate because at the end of the day real estate is brought by people and people matter! Demographics is basically statistics about the population in a given real estate market along with it’s subgroups. Demographic factors include aspects like:
- Income level
- Marital status
- Family size
If you are a real estate investor you should like all other seasoned real estate investors use demographic data to make crucial decisions about factors such as what types of properties to buy, which specific geographical areas to focus on, and how to make prudent investment decisions based on current and future population trends. When it comes to residential properties, large shifts in demographics can have an impact on property rates for a long time. For example as the current population moves towards retirement there could be huge changes in the Indian real estate market because today’s young generation in India does not seem to be that intent on buying properties and taking on huge mortgage liabilities like earlier generations. This could negatively impact the real estate market ten to fifteen years down the line. As families shrink and the number of single men and women increase, families who own large family homes today would downsize their property needs as their families shrink over the years increasing the number of single-family homes available for sale ten to twenty years later. More resale homes on the market could in turn cause a sharp decline in home sale prices which is bad for home owners but a benefit for real estate investors who would want to buy properties going for a steal.
4. Government Measures
The national and state government’s measures and actions can have a big impact on both the demand for real estate and also the value of property. The Government can boost demand in certain areas by offering tax deductions, tax credits and subsidies to encourage investor interest. The government can also create policies and legislation that improve investor confidence and buyer sentiments such as the RERA act initiated by the government during 2016 – 17.
The National Housing Bank – a Government of India owned entity raised liquidity to housing finance companies last year. The Indian government also relaxed ECB funds and approval of a ₹ 25,000 Cr. housing fund that covered 1,600 projects with almost 500,000 dwelling units thus improving investor confidence and in the process creating large scale employment. Though in the current pandemic, the GOI has not announced any measures for the real estate market it is expected to do so in the post-Covid scenario. As the economy limps back to normalcy, Government actions and measures will go a long way towards restoring the market back where it belongs.
As we have seen, the real estate market in India offers ample opportunity for NRI’s and HNI’s in India to invest their money and reap excellent returns provided they keep the above four factors in mind before investing in the Indian Real Estate Market!