The current victim of the Covid-19 Pandemic mayhem is the World of Real Estate. Not only in India but around the Globe. Nation’s long-suffering real estate market has been taken to rags in this grieve stricken year.
House sales are struggling to with not one but many problems since the last few years. Starting with demonetisation to introduction of newer and stricter housing laws, the list goes on.
A credit crisis in the last years has stalled projects with an unfinished building/infrastructures at every nook and corner, leaving developers with an overstuffed inventory purchase and residents of re-development projects homeless.
The Corona virus induced Lockdown not only triggered unemployment, salary and wage wounds but also infrared investor’s capitalizing control let alone their purchasing power. Real estate business and sales in India’s top tier cities fell to the lowest rate ever seen in an entire decade, in the early months of 2020 itself.
When enquired about this problem to a few Developers, they describe it as a sorry state of demand for properties, low foreign currency in the market due to return of employees especially from the Middle East, low interest rates on Housing loan and lastly the unfortunate weaker currency of our country.
However, the tables can turn anytime as now, more than ever; investors are looking for Real Estate Investments for stable security of themselves and their families. If this potential demand gets converted into sales then this could be a the highest in History for Real Estate, once the travel restrictions unlock.
This article provides insight on everything a common man needs to know from hidden treasures to risk analysis in one place and simple language of understanding. Let’s explore the World of Real Estate together!
A beginner’s guide- What is Real Estate?
Real estate is a property say- land or building, the air ssurrounding that land and everything below it. Yes, it also includes a tree that might come in the borders of that piece of estate.
The term real estate means something that exists like a physical property.
Some scholars propose that ‘Real’ comes from the Latin word rex, meaning “royal,” since kings used to own all land in their kingdoms.
Estate can be described as the land on which the property exists. Hench, Real estate refers to the property consisting of Houses on Land.
Real Estate is Divided into Four Main Types:
1. Residential real estate comprises of both new construction and resale or re-construction homes. The most common category is single-family homes namely- condominiums, co-operative societies, townhouses, duplexes, triple-deckers, quad-plexes, high value homes, multi-generational and vacation houses.
2. Commercial real estate includes shopping centres and malls, medical and educational buildings, hotels and offices. Apartment buildings are often considered commercial, albeit they’re used for residences. That’s because they are owned to produce revenue where people rent it out for additional passive income.
3. Industrial real estate means the manufacturing buildings and property for storage purposes like warehouses. The buildings are often used for research, production, storage, and distribution of products . The classification is vital because the zoning, construction, and sales are handled differently.
4. Land Real Estate includes vacant land, working farms, and ranches. The vacant land includes undeveloped, early development or reuse, subdivision and sites and factories land.
Why is Real Estate a Big Market in India?
The real estate is a big market because all properties available for sale in a given area form a big part of the trading business. For example, all properties for sale in Mumbai City’s Metropolitan Area could be referred to as Mumbai City’s real estate market.
Economic forces in a given area can cause an increase (or a decrease) in the supply of properties. This can in turn cause prices generally to fall (or rise). This is what people mean when they say the market is up or down.
The Indian real estate market is actually made up of hundreds of smaller city and regional real estate markets. While prices in these markets mostly move independently, there are some factors that can affect the Indian economy as a whole.
What Drives Real Estate Market Changes- the ups and downs?
Much of the real estate market is driven by economic principles especially local principles which can affect one market but not another. One can partially regard it as the micro economic aspect.
The Demand and Supply’s relationship is to be studied for further understanding:
• Income affects local real estate demand. If incomes in a local area are high, people have more money and are more likely to want to buy a house.
• Jobs and employment affect local real estate demand. If a city shuts down its businesses, those workers will need to look for a new job. This will limit their ability to buy a new home as a priority will be to fin a employment.
• In some rural areas the nearest bank may be several hours away. This can limit demand simply due to the difficulty in obtaining a loan. Hence the limited credit availability.
• Land constraints are a classic example of a supply factor. There is very little room on some places to increase supply, so prices remain persistently high.
• Inflation affects a consumer’s real income. When the price of goods and services rise, an individual’s income is worth less, which limits his or her ability to purchase a home.
• Taxes – The federal government has, at times, provided tax credits for first-time homebuyers. The latest example was between the years 2008 and 2010 as a way to stimulate demand during the recovery from the great recession.
• Other reasons – Exposure to weather, retirement age group, additional costs, geographical location affecting transportation, personal choice and likings, fear of risk, Government policies and international market’s indirect affect.
But not all of is dependent Economic and financial principles-
In the real world, there are any number of drivers that can push people to buy or sell. There are fads and styles. Think the desirability of purchasing a home today. Millennials unlike Boomers prefer renting of houses and their priority is not purchasing a permanent house thanks to the trend of – ‘wanderlust.’
There are also family and business changes that may cause people to relocate. There is also the fact that real estate is relatively illiquid, meaning it is difficult to convert to cash. It takes time and effort to buy or sell a home, which prevents people from doing it more often.
What makes the Real Estate Market Investment different from others?
There are several factors that separate the important estate market from a typical market. Many of these factors have to do with real estate itself and how it behaves as a good. However, the main three factors in the current situation are as follows:
Long-lasting: Real estate is not consumed in the way that many goods are. Instead, real estate persists. And in many cases, it appreciates. This gives real estate different properties. It is a investment for present and future.
Seosonal: Real estate activity varies by season. In the winter, when the climate is harsh in many places, activity dwindles. In the summer, when the weather is nice, it picks up. This makes it difficult to compare real estate figures month-to-month. Instead, these figures must be “seasonally adjusted” to provide an estimate of what real estate activity would look like all else held constant.
Geographicaal location: Real estate has many attributes that make prices and market activity specific to at least one area. First, real estate is not portable. Unlike portable goods like Petroleum oil, which can be bought where prices are low and shipped to where prices are high, real estate cannot be transported and stored.
Secondly, human activity is limited. Most of us spend the vast majority of our existence within a few miles of our home. This means the determinants of the value of that home are limited to the area within those few miles. All of this serves to form land an area good during which prices vary widely even within an equivalent region.
Covid-19: What Crisis is the Real estate in India going through in 2020?
In the last three decades, most spectacularly after 2003, residential real estate markets and businesses in India have been built on steroids of large capital gains and black money.
Between 2003-2013, stories of residential plot prices doubling every three-four years and residential houses / flats giving 20-30% returns per annum in most urban markets of India were very common. This bull market invited all kind of people- using own savings, borrowing funds from Banks and others, deploying proceeds of corruption and black income and diversion of funds from other legitimate businesses- to buy and book plots, houses and flats. Nobody really cared about the sustainable/reasonable price of lands.
Lands were bought, many times even without caring for right title, at whatever prices available and houses and flats sold there on, many times in “pre-launch roadshows” even when the land was not in physical possession.
All prices – land, houses, flats- were simply zooming without anybody worrying about the “bubble” which it was becoming ready to burst on the people inside it. Prices of real estate in India, at many places, put the real estate prices in developed economies to shame.
Whether you live on rent or you live in your own house, as far as the basic service of living is concerned, you get the same economic value. Therefore, fundamental value of a house/flat can be determined with respect of capital value of rentals it earns.
For example– If you invest Rs.1 crore in a house borrowing money at 10% and it yields you a rent of Rs. 4 lakhs a year, the fundamental value of the house is actually only 40 lakhs.
Many people were investing in such houses hoping that the price would double to Rs. 2 crores in five years or give about 20% per annum of capital appreciation. But who is going to purchase it from you?
If this capital appreciation materialised, it did not matter whether you keep the house empty for five years without earning rents. The moment this capital appreciation disappears, the house/flat you invested in becomes a “liability” rather than an “asset”.
The builders smelt large profits in real estate projects. Building land projects doesn’t require any complex technological knowledge, apart from possibly the high-rise buildings. Thousands of small ‘builders” entered the arena. Many large real estate companies undertook hundreds of projects across the country with small and weak foundation of low equity capital and high leverage of loan financing.
Following global financial crisis, which also had its origin in real estate, Indian real estate prices stated amending somewhere around 2011-2012. Since then, there has been no significant increase in house or plot or flat prices in most places in India. Once real estate prices stopped growing at high rates, the speculative interest was highlighted. This brought down the demand for residential real estate materially. The builders treated this as short term, hoping the boom to come back soon. Guess what? It did not.
Demonetisation delivered the final blow (or what we thought as the last before the start of the year 2020). It took away the major driver of the speculative demand. Deprived of the possibility of huge capital gains and removal of the support of unaccounted funds, the residential real estate industry virtually became insolvent in 2017.
By the end of 2019, lakhs of completed units had no buyers. Lakhs of incomplete units were not getting completed on account of these projects having become insolvent.
Even today, there are no reliable estimates available of the residential real estate projects which are stalled and incomplete, the extent of real gap between their liabilities and assets and how much more money is required to complete the projects. No public agencies collect these data and place in the public domain.
Why Real Estate is so Expensive in India – where the middle class population is high and yet there are projects with empty houses?
The only biggest problem seen with real estate in India is that the sector is very closely connected to the politicians-builder monetary relationship. Until transparency is not established in real estate, buyers will wait for the prices to fall but it may not really happen in real.
Economics tells us that owing to the current scenario realty prices should go down, but politics (which has always had a heavy hand in Indian Businesses and markets) shows that this is not going to happen.
India’s real estate remains as a massively corrupt industry. This coupled with the ever-rising demand will keep this industry in the bubble. The bubble which is filling itself with more and more infrastructures (unoccupied) only to one-day burst on us all.
Real estate might as well cost less than 60% of what it ranges now if the corruption and bribes are pulled out of its market.
Yet we invest in Real Estate because it Builds Wealth More Consistently Than Other Asset Classes.
Ten years ago this headline would have angered a mob of people who were the victims of failed real estate investment. It felt like the market would never recover. Fast forward a few short years and now massive wealth is being built through real estate by common people like you and me.
Cash flow is the money you have left over from the rent you’ve collected after all expenses have been paid. Most real estate has expenses such as a mortgage, property taxes, insurance, maintenance, and property management fees. When you buy a property that pulls in additional rent monthly than the expenses you carry to have it, your income is positive.
Appreciation, or the rising of home prices over time, is how the bulk of wealth is made in land . This is how people make a large win of money. While prices fluctuate, over the long run real estate values have always gone up, and there is no reason to think that is going to change.
Even though the name are often deceiving, Depreciation isn’t the worth of land dropping. It is actually a tax term describing your ability to write off part of the value of the asset itself every year. This significantly reduces the tax burden on the money you do make, giving you one more reason real estate protects your wealth while growing it.
Leverage is one of the best things about real estate investments. By nature, land is one among the simplest assets to leverage. Not only is it easy to leverage the financing of it, but the terms are incredible compared to the other quite loan.
Covid-19: How Real Estate is expected to take shape in India?
Real Estate launches dropped 56% in the first half of 2020 compared to the second half of 2019 as per reports. Consequently, supply of units has dropped to its lowest levels in 5 years. As per reports, sales from January to June 200 exceeded launches despite the Covid-19 pandemic but were 49% lower year on year at 57940 units.
Sales in all cities put together declined to 46% from 51 % over the second half of 2019. The demand slowdown has pulled prices lower but between 5-25% depending on location and asset class staying range bound across cities during year 2020. This is the highest price decline luxury housing has ever seen.
The trend is expected to continue as developers are eager to liquidate existing inventories in terms of cities Bengaluru remained the most active market while on the other hand Hyderabad had the most unsold inventories. The inventory overhang increased to 44 months to 13 months over last few periods. Researchers suggest that stalled residential real estate demand could show signs of gradual pickup in 6-12 month once Covid-19 impact reduces on account of Corona lockdown and work from home there has been increased demand for customised work areas and wellness spaces.
It has also led to shocking impact in India’s commercial property markets. However, office space and Business parks REITs may fall by 30% in 2020 due to the work from home of Civid-19 pandemic.
On the residential front as well job uncertainties and pay cuts are keeping the salaried class very often investing in real estate for better personal finance. However, a gradual and timely change is likely in property prices rather than sudden drop. Surprises could stagnate over time while inflation and income rises. Globally 16 of 20 major cities are expected to witness a decline in housing prices through the rest of this current year.
The migration of people from cities to towns and villages has opened up a whole new line of building infrastructure opportunities for the real estate sector.
NRIs Bid Hopes For India’s Distressed Real Estate Market?
While not many Indians are buying, developers have seen a spike in enquiries and demand from non-resident Indians within the ongoing fiscal year . This demand could compensate for the gap in the first half of 2020.
Almost 40,000 NRIs are probably looking to purchase assets in India, according to Amit Goenka, managing director and chief executive officer of Nisus Finance Services Co. Pvt. Ltd.- a specialized organisation in real estate services.
The asset prices in regions like Middle East have fallen and hence these residents outside India are looking back at the homeland for security.
“Digital tools like virtual tours and walkthroughs allow potential customers to experience the property, understand the small print of the entire project and book it online,” said Chintan Sheth, director of Ashwin Sheth Group, a Mumbai-based developer to the Bloomberg website.
Bonus tip: what is the Best land Investment?
The size and scale of the important estate market make it a beautiful and lucrative marketplace for many investors. Investors can invest directly in physical land or prefer to invest indirectly through managed funds.
Investing directly in land involves purchasing the residential or commercial property to use as an income-producing property or for resale at a future time. Indirect ways to take a position within the land market include investing in Real estate investment trusts (REITs), land exchange-traded funds (ETFs), commingled land funds (CREFs) and infrastructure funds.
Due to the upper liquidity available within the market, the lower transaction costs, and lower capital requirements, average investors like better to indirectly invest in land .