Is the realty sector waking up from its sleep?
Industry Analysis: Indian Real Estate Sector
You're probably considering buying a new house or renting out a bigger one. But do you know what that means to the realty sector? Find out below.
The sudden wake of the realty stocks in India made us pull out some stats for the real estate sector. Turns out that the real estate industry in India contributes around 7-8% to the GDP and is the 2nd highest employment generator of the country. Reports suggest that by 2040, the current real estate market will grow to Rs. 65,000 crores (US$ 9.30 billion). Expected to reach a market size of US$ 1 trillion by 2030, the sector is mainly made up of housing, retail, hospitality, and commercial as its main components and significantly contributes to the much needed infrastructure for the growing demographic of India.
Retail real estate and warehousing segment attracted private equity (PE) investments of US$ 220 million and US$ 971 million, respectively in 2020. Foreign investors have also pumped in money here, especially in metros and upcoming cities/towns like Bangalore, Ahmedabad, Pune, Chennai and Goa.
Home sales volume across major cities have also risen, signifying a healthy recovery post the strict lockdown imposed due to the spread of COVID-19 in the country.
Real estate is a unique cyclical market which is different for each locality. Each area has its own demand supply dynamics. Typical for this kind of asset class, prices are less transparent and there exists a great but risky opportunity. The following graphic will help you understand the cyclical nature better.
There are broadly 3 types of companies that make money here namely developers & construction, brokerage firms and property management consultants.
Developers & construction companies: These companies first buy land or enter a joint venture; in areas that they envision are growing, build their projects (ie. residential or commercial complexes) and sell these finished spaces at a premium. Though their model seems pretty straight forward, they involve a lot of work right from the beginning in legal hassles, architecture and design of the building and selling these to the public ultimately, which is a huge task for a tough crowd like India. They are the 'makers of inventory' and earn a high ROI.
Brokerage Firms: These are pretty much like they sound. They undertake selling on behalf of the developers and buying on behalf of retail clients. Most deal in resale properties too. These firms offer professional services enabling a buyer to get their required properties right from identifying the locality to providing auxiliary services like stamp duty, valuation, etc. Needless to mention, professional brokerage services are very few in number and most of the brokers operate in the unorganized market which is roughly 75% of the total.
Property Management Consultants & Facility Management Companies: PMCs help in development of new projects and redevelopment of old and dilapidated buildings.Facility management companies take responsibility for day-to-day repairs and ongoing maintenance, security, and upkeep of investment properties for owners, typically apartment and condominium complexes, private home communities, malls, shopping centers, and industrial parks.
The Covid Effect
Real estate industry was in a low demand - low price phase as it is, and the start of Covid made it worse. There was a lot of inventory but people didn't have enough money in their pockets to buy / invest.
But the pandemic surely changed the mindset of people towards home ownership. Many companies realised they didn't need as much office space. The work from home culture made people want a big and beautiful home and the ongoing rock bottom housing prices presented an opportunity up for grabs.
The government also recognized the interest and came up with many initiatives to boost the industry that would not only ramp up demand but also benefit the economy at large. Some of them include the softening of interest rates on home loans to around 7% and the reduction of stamp duty from 5% to 2% in the state of Maharashtra. Some cash starved developers also introduced attractive schemes to incentivize the public to consider buying a property sooner than planned.
High expected growth rates of urbanization, rising salaries of the middle income group, increase in the working women population and an economy on the up move overall are supposed to contribute to the growth of this sector.
Though it may seem that all is going well for the industry, it comes with its own set of risks.
Since the market is still quite unorganized and vulnerable to frauds and legal hassles, it greatly depends on government reforms to make it more accessible and trustworthy to the general population. However, the MahaRERA Act imposed by the Maharashtra government has addressed this problem and plays a big role in making the consumer more aware of his/her rights, providing protection from unscrupulous developers and fraudulent brokers.
According to MahaRERA, "RERA is an Act to establish the Real Estate Regulatory Authority for regulation and promotion of the real estate sector and to ensure sale of plot, apartment or building, as the case may be, or sale of real estate project, in an efficient and transparent manner and to protect the interest of consumers in the real estate sector and to establish an adjudicating mechanism for speedy redressal of disputes."
Another structural problem for this industry is the unsold inventory today causing the prices to remain low for a prolonged period, and reviving the demand for commercial space will be a slow one.
Also, at the end, real estate is an illiquid asset class, i.e. cannot be sold quickly for cash and misinformation coupled with mispricing mostly shuns away investors from locking in huge chunks of money.
There are mainly 3 ways you can invest in this industry: directly, through REITs or through realty stocks.
Direct Investing: Investing directly is a tedious process if you're a newbie, since it involves detailed analysis of a lot of factors in making a good choice, but is the most lucrative. Overall, a good strategy would be to invest in commercial shops, since they provide handsome returns both in terms of capital appreciation and rental income. In the case of investing in residential properties, it's better to stick with the good names like Godrej and Oberoi among others, that have a good track record in delivering projects in time. Looking for properties in localities that are on the verge of development will provide a great advantage.
REITs: Real Estate Investment Trusts are companies that own, operate, or finance income-generating real estate. They work on pooling of funds to return a decent ROI to investors. Although a hit in developed economies, they are in the nascent stage in India and primarily invest in warehouses and office spaces, not offering more than 7-8% annually. You can start with as low as 10,000 rupees.
Realty Stocks: You can participate in the winning companies of this industry by buying their equity. This is the perfect time to bet on these stocks since we are amid a fast growing economy and the demand for property is picking up. Sticking to the best in the business, analyst recommendations stand as below:
In a nutshell,
The Indian realty industry is a cyclical industry and is currently gaining momentum. Though reviving the industry needs extensive government support; urbanization and strong demand can contribute to making it a lucrative investment over the long term.