Mumbai, Feb 28: Collapse of US housing market led to bankruptcy filing of financial services giant, Lehman Brothers in 2008. This was the last straw of US sub-prime crisis, which eventually led to a deep recession worldwide. During 2003-2008 period, India was also part of the asset price bubble trend. Like developed economies, the country has also witnessed a sharp rise in real estate prices with multiple launches coming up in various geographies.
As subprime crisis engulfed the global economy, its tremors started to be felt in India. Real estate prices slowly started to fall as demand receded on the back of a bleak economic outlook. Inventory piled up across geographies both in residential and commercial real estate segments. While homebuyers struggled to get timely delivery, realtors in India started facing problems of overleveraged balance sheets. Higher interest outgo resulted in several defaults by realtors. Meanwhile, the Real Estate (Regulation and Development) Act (RERA) was passed by the Parliament in 2016-17 in a bid to protect the interest of homebuyers and to promote transparency. This law has created further disruption in the market with slowdown effect on residential real estate segment.
However, things have started looking up in the recent time. While residential properties are witnessing slow demand revival, commercial properties have again come to the centre of investors’ attraction. “With the residential real estate sector showing no clear signs of revival until recently, there was a distinct shift of well-heeled investors’ focus towards commercial properties as this sector now delivers very satisfactory yields,” Anuj Puri, chairman of ANAROCK Property Consultants told The Finapolis in an email reply.
“There has been a fairly consistent rise in demand for commercial spaces like Grade A offices and IT parks. This is likely to continue until the Indian residential sector gets firmly into revival mode,” Puri added.
Notably, during 2003-07 period, many wealthy investors had taken active exposure in the real estate space with some receiving returns multiples of their capital investment. Analysts are of the opinion that though the same level of return can’t be expected in the present economic environment, real estate will definitely give better yields than many financial instruments. Even introduction of REITs (Real Estate Investment Trust) now provides an opportunity for retail investors to participate in real estate space.
“In the current market environment, investors can certainly expect very good returns in the commercial real estate asset class. In fact, the inception of REITs is likely to push more investments into commercial properties in near future,” Puri of ANAROCK Property Consultants said.
REIT is an investment instrument that allows individual investors to invest in commercial real estate without actually buying those assets. These financial products provide investors with all types of income streams along with benefits of long-term capital appreciation. “While REITs will open up the possibility of investing in commercial properties at much more affordable entry points, this investment platform will only find wide acceptance once the first formal REIT listings happen in India,” Puri said.
Meanwhile, investors looking to invest in commercial real estate can look at key metro cities to generate higher return on their investment. “We have seen cities like Bangalore, Hyderabad and Pune absorbing maximum space in last two years. Going ahead, this trend is likely to continue given the established ecosystem and availability of human resources in these cities,” Mathew Kurian Eranat, assistant vice-president of rating agency ICRA, said.
Notably, a report by real estate consultant- Cushman and Wakefield said that a total of around 30 million square feet of commercial real estate was absorbed in 2017. Last year also saw more than 50 large transactions taking place in the commercial real estate space. Some of the major transactions involving large and small corporations include Microsoft, TCS, Accenture, Alibaba, Amazon, Deloitte and Google among others.
Apart from investment in commercial real estate segment, affordable housing is another emerging theme which can generate good returns. According to analysts, peripheral suburbs of the top 7 cities of India are very suitable for investments into affordable housing projects by reputed, RERA-registered developers.