In the last decade, India’s real estate sector has seen tremendous growth because of two key factors. First, as India has transformed itself into a middle-income nation, incomes have risen and so have people’s aspirations and ability to pay for nicer, modern homes. Second, much of India’s growth has been in the urban service sector (e.g. IT) and this has accelerated India’s already rapid rate of urbanization, writes Vikram Chari.
The combined effect of the two mega-trends has been phenomenal: India’s real estate market is expected to touch U.S. $180 billion by the end of this decade, up from U.S. $16 billion in 2006. As India’s economy appears poised for even greater growth in the coming decades, we are going to witness a once-in-a-generation opportunity to profit from its growth.
It is then of little surprise that foreign institutional investors and private equity funds, such as The Blackstone Group and Golden State Capital, had pumped $23.1 billion into Indian properties by February of 2014. However, while foreign institutional investors have identified and found ways to take advantage of India’s real estate opportunity, individuals, particularly NRIs far from home, have found it more difficult to participate in the wealth-creation.
Although real estate is witnessing strong macro growth, one of the new trends has been that the epicenter of this growth has shifted from the traditional strongholds of Mumbai and Delhi to rapidly-growing IT-dominated cities such as Bangalore, Pune and Chennai. These cities have the perfect mix of attributes for investors: strong population growth, high median incomes and low property prices. Bangalore is the best example of this trend. Not only is it India’s fastest-growing major city, it is also one with an average white-collar salary that is higher than that of any other city in India. While the traditional cities of Mumbai and Delhi have witnessed highly volatile property prices fueled by the mood swings of fickle investors, Bangalore has witnessed an excellent yet steady growth in property prices averaging 13 percent over the last few years.
Another new trend in the real estate sector has been the way people pay for property. In the past, people were cautious and paid for property through family savings, disposal of other assets and inheritance. The modern Indian homebuyer, on the other hand, is a confident professional who does not mind taking a home loan. This has resulted in massive growth in India’s home loan business that has nearly doubled in size from U.S. $24 billion in 2010 to roughly U.S. $48 billion today. One of the unintended and beneficial consequences of the growth of mortgages is that real estate is rapidly being transformed from an industry dominated by black money to one that is increasingly transparent. Indeed, in IT dominated cities such as Bangalore and Pune, over 80 percent of property transactions have no black money element in them.
Real estate investment is gaining even more traction today because of the following environmental factors:
- Investment outlook: Ernst & Young places India as the 5th most attractive real estate market in the world.
- Government impetus: The new government at the Center, has committed to the development of infrastructure and promised regulatory reforms, which has reinforced investor confidence.
- Continued demand: While sectors like IT and financial services are growing steadily, new sectors such as e-commerce are expanding rapidly and creating employment for skilled labor in tier-1 cities.
Planning to invest?
The current market environment presents an incredible opportunity for individual investors. The process of investing in real estate is no longer as cumbersome and risky as it used to be. Educated professionals in India are increasingly beginning to tap into this growth story by making their first real estate investment in their mid-to-late twenties. Enabled by the ease of investment, flexible ticket sizes and a great degree of safety, some of the new ways of investing in Indian real estate are further fuelling the Indian real estate market’s growth.
An NRI investor interested in investing in India’s real estate growth story should explore a couple of convenient investment options. One of them is a new genre of company, called a “crowd investing” company, which offers investors an attractive way to participate in the high growth phase of a project. A crowd investing company typically enters a project in its early, high-growth, stage. Due to its large transaction size, it can negotiate prices with developers that are much lower than the launch price of the project. This not only increases returns but also creates a margin of safety for investors. Since real estate is an industry that is plagued with counter party risk, crowd investing companies also structure the transaction such that they have sufficient collateral to secure the transaction. Crowd investing, like REITs, has low entry barriers with ticket sizes that can be as little as a few lakh rupees. Another advantage of crowd investing is that the typical investment period is only 1 to 2 years, thereby allowing investors to exit projects quickly.
The second option is a real estate product called Real Estate Investment Trust (REIT). A REIT is a fund where the units are traded in the stock market and therefore provide liquidity similar to stocks. Investors will have ticket size flexibility, with minimum investments as little as Rs. 2 lakhs. A REIT, in India, is only allowed to invest in the lower-growth but rent-producing phase of a project. Since rents grow over time, an REIT can be a good way to invest money in an asset that generates cash flow and is also protected from inflation.
While crowd investing and REITs are both excellent options for NRIs, crowd investing is especially promising because it lets investors take advantage of the highest-growth stage of a project while mitigating the risks typically associated with this stage. It is one of the evolutions of the real estate sector that savvy investors are taking advantage of because it is best designed to capitalize on the India growth story.