Will real estate continue remain the safest investment during this pandemic?
The Covid-19 outbreak has led to a complete lockdown of the economy. The stock market volatility is rising and people are looking at more secure options for investment. The crisis has highlighted the need for shelter and protection in tough times. The pandemic has opened a new era of the Indian real estate market that was under-utilized till now. Priorities for most people have changed and they are realizing the importance of owning a home which will increase the real estate investment opportunities in the post-Covid-19 world.
Real estate growth in India may not yield immediate results but by being less unstable than the market-driven investments, definitely real estate is a safer investment in the current situation. The demand for residential flats in India is likely to increase as millennials are key demand drivers, their preferences are now dictated by the prevailing uncertainties. Some of the factors leading to increase in investment are as below:
- Adoption of Technology: There is a major shift towards the adoption of online portals; with people who favoured offline property search are now preferring online real estate portals to search their dream homes. There has also been a demand for virtual tours or visits wherein home-buyers are opting for virtual tours either to shortlist or to finalise their homes.
- Government Policies: The general home-buying sentiment is being driven by cheaper home loan interest rates announced by the Central Bank. The revision of the reserve repo rate from 4% to 3.75% will promote the banks to infuse liquidity parked with them into the market thereby easing the liquidity. Allowing NBFCs, who have given loans to real estate companies to get similar benefits as given by the scheduled commercial banks, at a challenging time like this is an encouraging sign. Commercial real asset class loans will also observe a momentum as deferment of payment up to 1year which will allow developers more time to construct and deliver projects on time thereby spurring demand in the market.
- NRI Investment: The size of the NRI investor market is huge in the affordable and mid-segment housing category. The falling rate of the rupee increases the interest among the NRIs to buy residential property. The time to invest in the most tangible and rewarding asset in a post-pandemic world has never been better.
4. Pre-Covid, the focus of investment was in commercial property as co-working offices witnessed an exponential rise. With the current situation, there is a change in consumer behavior and millennials are looking to buy residential properties in the mid and affordable segment. The affordable housing segment has grown at a rapid pace with the backing of the Central Government through its flagship initiative of Pradhan Mantri Awas Yojana (PMAY). Deducting of reverse repo rate, an extension of RERA deadline, and the recapitalization of NBFCs alongside earmarking INR 10,000 crores for the National Housing Bank (NHB) will ensure a smoother flow of capital to HFCs thereby expanding credit support to developers. All these steps will influence buyer sentiment and increase the chances of higher purchasing power. This segment has always had a great demand and post Covid-19 it will increase manifold as fence-sitters will buy them.
5. The government further reinforced the affordable housing segment by extending the Credit Linked Subsidy Scheme (CLSS) for the middle-income group up to March 2021. Additionally, it opened a new investment class in the form of an affordable rental accommodation scheme for migrant workers and the urban poor. Another trend that shall help in increasing the demand for affordable homes is that of reverse migration. It shall spur housing demand in Tier-2 and Tier-3 cities giving developers the option to expand their projects to these markets as well.
More stable than other forms of investment
Compared to other forms of investment, real estate growth is stable in the long-term. Stocks, for instance, carry with them a lot more volatility and are much more affected by economic crises. On the other hand, in commercial real estate, the influence of COVID-19 won’t be seen until much later because of the nature of the Indian Real Estate market.
Another benefit investing in real estate offers is the fact that, unlike stocks, they are a physical asset that you can actually use – even if the overall value depreciates, you’ll still be left with a physical asset. Real estate is simply a much safer option for those willing to invest.
Let’s look at the most recent disturbance to global economics, the 2008 financial crisis. While each market was different, most real estate markets fell between 20% – 25%, including the UK at 20%. Stocks, on the other hand, fell much more rapidly in just a few weeks and didn’t recover quickly. By 2009, the Dow Jones fell 50% – the biggest drop in the stock market since the Great Depression.
According to a survey, property prices in large metros have fallen 2-9 percent after the lockdown announced in March.
On the face of it, this appears to be an honest opportunity for home buyers, especially those getting to buy for self-use. But it's likely that good prices could become even better within the coming months. Deepak Parekh, the grand old man of housing finance in India, says that property prices could correct by up to twenty percent thanks to the demand drought caused by the COVID-19 pandemic.
Property as investment
A lot of individuals may additionally be looking to invest in property now. After the stock exchange crash, they don’t want to risk their money in volatile instruments. But fixed income options aren't looking very attractive after a flurry of rate cuts. On top of that, the recent Franklin Templeton debacle has taken the sheen off debt funds. Property is seen as a safer bet which will still hold value even during a downturn.
Even so, invest in property as long as the time horizon is a minimum of 8-10 years. That's the minimum time that an investment will get to earn good returns. It'd even be a more robust idea to invest in commercial property where the rental yield is more than that of a residential property.
Is this the time to buy?
A clear distinction between self-use and investment is important. For those looking to shop for a house for self-use, the chance could show up within the next few months. If you're going to take a loan for purchasing the property, get an in-principle home loan approval from the lender. Banks give such loan approvals solely on the basis of the credit history and repayment capacity of the bidder. The lockdown has delayed the method, so you will have to act immediately.
There is also an opportunity that tons of repossessed properties may enter the Indian real estate market over the subsequent few months. As mentioned earlier, tons of individuals have suffered salary cuts and job losses. Those with hefty loan commitments might not be in a position to service their EMIs. Although the RBI has asked banks to offer a three-month payment moratorium to all or any borrowers, there's little hope of things returning to normal after June and there are likely to be a large number of defaults.
When a borrower defaults on loan repayments, the lender seizes (or repossesses) the property. These properties are then auctioned off to recover the outstanding loan amount. Typically, the costs in auction are 20-30 per cent less than the prevailing market rates. But this is often difficult terrain. Auctioned properties are usually embroiled in legal disputes or have unpaid bills and loans against them. After it's bought in the auction, the customer has got to bear these expenses and settle the outstanding dues. Therefore, the important cost of the property might be significantly above anticipated.
The normal due diligence is undertaken while buying a property is going to be hampered, thanks to the lockdown across the country. Even so, a visit is important before you sign the deal. An honest property consultant will be ready to assess the structural quality of the building and point out other issues. it's also recommended to take the required assistance of a property lawyer to review the ownership papers and other documents. An expert is necessary to spot if there's something amiss.