Investors expect a V-shape recovery in India’s real estate market as the economy shows signs of revival and demand returns. Namrata Kohli brings some insights on how to play the real estate market
The Indian real estate market suffered in the coronavirus pandemic but the third quarter of 2020 marks a turning point. The time has come after many years to invest as both macro and micro economic indicators favour the market, said analysts.
“Investors have remained bullish on the long-term prospects and voted with their deployments in the third quarter,” said Dr Samantak Das, chief economist and head of research and REIS (India), JLL.
“The interest rate is at a historic low. We are expecting a huge currency depreciation along with price inflation of 5-7%. The economy is ready to bounce back with (a) promising GDP in near future; and the central banks across the world are pumping cash into system,” said Anuranjan Mohnot, managing director and chief executive officer (CEO) at Lumos Alternate Investment Advisors Pvt. Ltd.
“All this is going to lead to asset inflation which will in turn lead to a huge appreciation in real estate. Gold is at an all-time high; stock market too is booming, and people are expecting correction but real estate as an asset class has not performed in last four-five years. This is the right time for entry of the serious investor,” said Mohnot.
A realistic realty investor
Experts said real estate is ideal for investors who have a capital of at least Rs 2 crore to Rs 4 crore and can wait for five years. This money should not be touched, for real estate is a quantum game and investors don’t need to monitor prices daily. A lucrative option is the under-construction, mid-market residential projects by developers who have record of delivery and financial closure. Staggered payments help in reducing risk and improving return.
Mohnot listed options: “In terms of location, IT cities like Bengaluru, Pune, Hyderabad and Chennai and some micro markets of Ahmedabad and NCR (national capital region) seem very promising. The price can range from Rs 50 lakhs to (Rs) 2 crores.”
“Generally, we recommend investing in real estate through AIF (alternative investment fund) or PMS (portfolio management services) to make sure that lot of risk related to due diligence of project is taken care of and an investor get his risk diversified over multiple cities, multiple developers and multiple projects. Depending on risk, investor could expect 16-18% pre-tax returns on a project level investment,” he said.
Tier-II and -III cities are a good investment proposition, said Deepak Goradia, president of CREDAI-MCHI, a group representing real estate developers. “I feel it’s worthwhile to invest in good residential projects in smaller cities, like plots and apartments in Ahmedabad, Raipur. Here the initial investment is less. However, historically, the returns on commercial real estate have been high and that is always a safe bet especially if you have a back-to-back lease with a long-term tenant.”
The commercial real estate investor is back in action, said Goradia, citing his example. For years, he tried to exit an IT park built by his company, Dosti Realty, in Thane, Maharashtra, but finally found investors willing to buy the property when the market started improving recently.
Real estate scares potential investors because of litigation—one may get sucked into court cases involving family disputes, encroachments or change in government policy–but due diligence and documents for a property reduce the risk. No wonder that investors build a margin of safety while computing profits. An investor might have factored a two-year horizon for an expected return of 24 per cent Internal Rate of Return (IRR), knowing that in case of delays she may end up only with 16-18% IRR but with similar expected multiple on capital.
The push for employees to work from home (WFH) is prompting some companies to vacate commercially leased spaces. Developers, as a result, are considering incorporating co-working spaces in residential projects and flexible workspaces in office buildings.
“The market of flex space is projected to grow at a steady pace throughout 2021and beyond. Resultantly, the market penetration of flex spaces into total office space is likely to see a gradual increase from the current 3.0% to 4.2% by 2023. We expect this growth to continue, driven by demand, profitability and return-profile for investors, albeit at a slower pace resulting from the impact of COVID-19,” said Ramesh Nair, CEO and country head (India) at JLLAmbar Maheshwari, CEO of Indiabulls Asset Management Company Ltd, said commercial real estate has done well for five-six years but cautioned individual investors from buying directly as they would have to tackle leasing and managing assets.
Investors are advised to avoid traditional central business districts (CBD), like Connaught Place and Nehru Place in Delhi, MG Road in Bengaluru, or Nariman Point and Lower Parel in Mumbai. “One building in Nariman Point would be typically owned by multiple individual owners. Therefore, the negotiating power of these individual owners compared to corporate tenants that occupy these properties is very low. Resultant rentals have been under pressure and vacancies increasing, what with corporate tenants leaving,” said Maheshwari.It is better to buy institutionally owned commercial real estate through a real estate investment trust (REIT)—India has two, Embassy Blackstone and Mindspace–or tap a private equity fund that owns commercial real estate, according to Maheshwari. Properties owned either by large developers or funds are good for investment as they have office space for large tenants.
The REIT way
Investors have reaped returns in the range of 9% and 11% through these two options. “REITs are a unique instrument and lie somewhere between equity and debt–in terms of risk they are less risky compared to equity and (give) slightly less return as well. When compared to debt, REITs are slightly riskier and therefore slightly more returns are there. But they give you a transparent and clear way to invest and you can easily hope to achieve returns between 9-11,” said Maheshwari.
Mindspace Business Parks’ $600-million REIT–India’s second such issue –was oversubscribed 13 times in the primary markets in August 2020. According to Ramesh Nair, CEO and Country Head (India), JLL, “We’re expecting a broad based ‘V-shape’ recovery in the Indian real estate market. The REITs market has done exceedingly well with the combined market cap of the India REITs at USD 6 bn accounting for 33% of the market cap of listed real estate companies,”
DLF, Godrej Properties, Sobha, and Prestige Estates are some good performing real estate stocks. The stock market has recovered to the pre-Covid-19 levels but there is still a lot of upside left in real estate stocks. Investing in Godrej Properties stock, as an example, will depend factors involving the company and not just the real estate market. An investment would be defined by the capital structure of Godrej Properties, return on capital employed, PE ratios, debt, and the company’s growth plans.
After the global financial crisis of 2007-08, investments in Indian real estate fell by 71% in Q1-Q3 of 2009 compared to the same period in 2008. However, investors came back with lessons learnt. Investments in Q1-Q3 of 2010 recovered 92%. According to JLL Research, this year a similar pattern has panned from Q1-Q3 2020 wherein investments declined by 73% although on a higher base.
Green shoots of recovery, like a strong response to REITs, large office and retail asset deals, and robust office sector fundamentals, indicate a pattern witnessed in 2010. Indian real estate has come a long way after the global financial crisis due to structural transformation and regulatory reforms of the last decade.
The churn is cyclical. “People who had invested in 2003 in Mumbai made a fortune in the real estate cycle till 2008. People who invested immediately after the financial crisis of 2008-9 made huge money until 2013. People who invested in 2013 are yet to make money. People who will invest now will see similar returns to what people have seen in 2008 when the financial crisis came,” said Mohnot, of Lumos.
Private equity funds and institutional finance for India’s Grade A commercial real estate continue. Said Anshuman Magazine, chairman and CEO at CBRE India, South East Asia, Middle East and Africa, “Following the current investment pattern, foreign institutional investors are more inclined towards commercial real estate in India as yields are higher and office deals will continue to dominate investment activities. Among alternate investable opportunities, REITs will continue to be viewed as a favored investment avenue given the comparatively resilient underlying cash flow to the sector.”
“With the industry becoming more organised and profitable, it will continue to attract investments from global as well as domestic players,” he said.