Real estate investments are time-tested and rightly so. Billionaires around the World have vouched for the fact that 90% of millionaires got their wealth by investing in real estate. Let’s see why real estate investments are a better deal than any other investment in your portfolio, especially during the pandemic times.
We have only to browse through History to see that returns have been highest when purchases have been made prudently at times of distress and fear. “I told you once before that there were two times for making big money, one in the upbuilding of a country and the other in its destruction. Slow money on the up-building, fast money in the crack-up. Remember my words. Perhaps they may be of use to you someday. (Rhett Butler)”― Margaret Mitchell, Gone with the Wind
As the country reels under the devastating effects of lockdown post-COVID-19 outbreak the priorities of the common man, businesses and investors have taken a hit. In the current scenario, when there is a consistent rise in the stock market volatility, people are looking at more secure options for investment. The pandemic has heightened the need for a safe home to face uncertain times. The unprecedented impact of the present crisis has also brought in slivers of hope in the real estate sector. With lockdown rules in place, people understand the importance of owning a home. It is one of the reasons for an increase in the demand for real estate in the post-COVID-19 world.
Prudent choices are about identifying asset and pricing cycles and crystallising the right investment thesis at the right point more so in real estate investment.
Let’s take a quick recap of how the pandemic has affected real estate investing.
We have seen that hotel and hospitality stocks around the globe took a downward slide in stock prices with the initial impact of the pandemic and escalated with the crisis progressing. In metro cities, malls have been hit hard and were the first to be shut down as social distancing measures were put in place by governments, so retailers are facing a hard battle negotiating rents for the period with landlords. The pandemic effect has also trickled down to reduce demand for logistics assets like warehouses. However, offices have been the last in line to take the hit as multinationals outsourced functions and rents were always a small part of operating costs. There may be a higher impact on all such leveraged assets if banks call in loans or ask for higher security. With hardly any income such asset owners may face significant burdens.
Why is real estate still a safe bet?Impact on Cap rates
The current cap rate in India stands at 7-9%. With cap rates directly correlated with the interest rates in the market, there is a related effect on real estate rates. Therefore, when interest rates go down on other investment products, cap rates on real estate go down as well. Market watchers expect interest rates to go down as governments try to ease the burden on banks and financial institutions and resuscitate consumer demand. Consequently, cap rates may go down further, providing significant upside to real estate investors when it is time to sell the assets.
Lending rates are at their lowest
Real estate is a safer bet in this uncertain situation as it is the lesser devil among the market-driven investments. Hence there is a high possibility of the rise in the demand for residential real estate among millennials. Market watchers cite favourable government policies as one of the main driving factors for this preference along with Cheaper home loan interest rates by Central Banks, revision of reverse repo rate from 4% to 3.75% easing liquidity, similar benefit to NBFCs, and the deferring of payment up to a year for developers. These are spurring a demand for real estate assets. The market is also witnessing a rising demand for residential properties among the NRIs as the rupee is on a downward slide.
Possible benefits in negotiations
Millennials can benefit from the current situation by negotiating with builders and property agents who are desperate to clear their inventory, to generate liquidity and resume cash flows. Many builders offer digital and virtual tours of properties so you can get an accurate idea of the property before you sign the deal.
Market watchers say that at present there is a lull in demand due to the lockdown. But things will see a surge once things get back to normal. It indicates an upward trend in the property prices in the post-COVID-19 world, which means you may have to pay more than what you have to pay today, for the same property. Hence it is better to invest in buying property while the benefits exist.
Developers can expect an increase in demand post COVID
The country’s large population will drive long-term growth, in the real estate sector, which requires continued investments into the residential building construction sector. 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 the reverse repo rate, an extension of RERA deadline with 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.
However, the future will depend largely on policy support and economic stability. Hopefully, in the festive period of 2020, the markets will be stable. Developers are optimistic for upcoming quarters which will see a positive outlook in demand. Another trend which shall help in increasing 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.
Points to remember while investing in real estate
Look to seal deals on assets at below replacement cost (cost of buying land and building the property from the ground-up). It will ensure that there will be no reduction in rents as new builds will take higher costs.
Go for leases which have longer lock-ins and where tenants have spent on the fit-outs. Such tenants will think twice about vacating them.
Keep an eye on favourable leases with yearly escalations of 5% instead of 15% every three years so that tenants find the increase more gradual. Try to sign deals with multinational tenants for whom rental costs are a small proportion of total revenues so that they do not look at these assets as cost centres.
Watch out and purchase only completed lease assets so that leasing and development risks are nil.