Investment in Real Estate-Good forever?
Someone once observed that real estate prices can never fall. There is only so much land in the world to sell real estate, and being a scarce commodity in that sense, demand and therefore prices of land, can only go up.
Yes, there will be some ups and downs, but the land market will never crash. And in the long term, investment in real estate – land and property — can only be profitable.
However, like someone also said, in the long term, we are all dead anyway, and it is the short and medium term that affects us the most.
And in the short term, buying ability, construction prices and interest rates determine property prices to a large extent.
Right now, the Indian property market or Real Estate per se is seeing some interesting swings. For a while, it seemed as if prices would continue on an upward spiral, and a house/ flat for Rs 1crore became matter of fact.
And then, the RBI struck. Loans to housing became stringent, interest rates went up and home buyers found life tough.
Now, it is the turn of the developers to struggle. On the one hand our land prices are still high, and on the other the falling prices of homes, with home loans once again getting priority; which would mean there is still much scope as far as Real estate is concerned.
But buyers are still cautious and are refusing to bite. Buyers are skeptical to invest may it be in real estate or in any other investments. Banks too, have yet to start looking at home loans again, despite directions to do so from the Government of India. In an attempt to get the segment back on track, developer associations such as CREDAI and the National Real Estate Developers, Council (Naredco) have both urged members to cut prices on properties. Developers, who are strapped for cash, are dangling various freebies, incentives, and easy payment options.
So the obvious focus for real estate seems to be the middle and low-income group housing schemes. The high-end homes are already in oversupply. Even commercial property is lying vacant. The only serious house buyers are these looking for a roof over their heads, rather than those looking at real estate as an investment option.
One other area that is expected to gain popularity during a slowdown is the affordable or low cost housing segment – which includes homes between Rs 3-20 lakh. This is attractive to the buyers – because of the lower prices and attractive to developers, because their initial investment can be a little lower, a boon in times of a funds crunch like now.
Once demand picks up, the construction industry thereby real estate itself is expected to revive.
The next few months will see a correction in rentals – a trend that has already set in. Rents have gone down anywhere between 10-50 percent, depending on the location. In the meantime, there is a lot of vacancy – in high-end luxury apartments, as well as office space. Companies too are putting off real estate decisions, waiting for conditions to improve before making any new investments.
One point of view is that the slowdown has only been a means to bring about a correction in real estate, bringing it down to more realistic levels. Developers will continue to find it difficult to raise funds and prices are expected to fall by at least 10-15 percent over the next 6-9 months.
Investment in real estate remains a good proposition, as long as it is direct investment. Real estate equity funds have taken a beating. A lot of private equity finds from investment banks that they are not in good shape either, in the wake of the global financial crisis.
