Real estate as an investment option in 2011
How should investors view investment in housing (as pure investment) during 2011?
If one looks at the historical data for the last 2 decade, investment in real estate (as an asset class) has given higher & faster returns compared with any other asset. This trend is likely to continue in the coming years. The main reason behind this is the huge demand supply mis-match that exists in the Indian housing sector. This mis-match is unlikely to be bridged and hence the sector will continue to give good returns to the investors.
Do you think that the real estate prices across most locations at present are inflated? If so, is it likely to give good returns to investors if they purchase property in the next few months and are these good times to invest?
Yes, I agree that there is an artificial inflation around property prices in most Indian cities, but I am not predicting any meaningful correction over 2011. In fact movement of property prices in India has never been governed by market forces. At makaan.com we are predicting the property prices to remain stable (with a slight negative bias) in the first half of 2011. This trend may reverse as we approach Q3 & Q4 of 2011. Homebuyers can use the first 6 months of 2011 to make the investment decision.
Do you see a correction in the offing?
In my opinion, there will not be any meaningful correction of property prices. Over the first six months of 2011, property prices are likely to remain stable with a slight negative bias.
How do you see the demand-supply equation in the real estate?
Demand and supply comparison is more artificial than real. This is peculiar of the Indian real estate market. There is almost infinite (relatively speaking) demand in the affordable housing (under 40 lac) segment. The affordable housing demand is driven by the huge migrant population (people who come to cities from small town and villages). The irony is that supply in this segment is not even 10% of the demand. Developers find it un-economical to enter this segment and there is no government support to encourage them. There were big promises around affordable housing during the downturn of 2008-09 but they got evaporated as soon as there was revival in sentiments in Q3 of 2009.
How do you rate commercial real estate as an investment option?
Commercial real estate investment in 2011 may be less rewarding compared to residential. There is enough supply that is ready for occupation and more is going to hit the market over the course of next 12 months. As per our estimate, the adoption of commercial property will pick up in the year 2011 but it will take another 18-24 months for the investment to give any meaningful returns. However, if one has a investment horizon of 3 years or more, commercial real estate investment may not be a bad idea.
Do you see new locations emerging (other than places like Mumbai, Gurgaon, Noida, Bangalore etc) where investment in real estate could give better returns?
There does not seem to be any planned approach to develop alternative growth areas. A good alternative option will have to have a good balance of retail, residential and commercial activity. Most new, so called property hot spots are at least 15-20 kms away from the main city with little or no infrastructure. People are investing there in expectation of an improvement in infrastructure and other hygiene facilities. If these expectations are not met, the appreciation will be very little. Buying in these areas will continue to be driven by people who are unable to afford anything meaningful in main cities. The appreciation here will be less compared to areas that have better infrastructure to offer.
Do you think that the loan scam would have an impact on the realty prices in the short term?
I do not thing the loan scam will have any meaningful impact on the realty prices. However as fallout of this scam there can be a temporary tightening of funding to developers. The scam may delay the IPO of some 8-10 real estate companies who were planning to raise money from the stock market. These companies will have to look for alternative funding sources and there are options available for that so I do not think that there will be a rub off of the scam on property prices.
Lenders have started withdrawing the teaser loan scheme. Do you think this is a good move? How will it impact borrowers and off-take of units?
This is indeed a good move. In my opinion, these loans were initially introduced as a sales promotion tool but ended up becoming part and parcel of the lending norm. They tempted people to invest in property, even if they were not financially sound to service the full loan. These and other practices were the root cause of the downturn in US & some European countries. I am happy that banks have withdrawn teaser loan. It will help curb the rising NPAs in the banking system.
What are you views on interest rate movement?
RBI has advocated for hardening of the interest rate to curtail inflation. After an initial resistance, we have seen that banks have started following the RBI guidelines. One can expect hardening of both deposit and lending rate over the first half of 2011, post which the situation should stabilize.