Rate cuts and new infrastructure will boost demand as per a new research report by Motilal Oswal Real Estate.
There’s good news for those who are concerned about what lies ahead for Indian real estate. A new Motilal Oswal Real Estate research report states that while the residential sector is currently facing short term challenges, the Indian real estate story will remain intact due to its inherent strong fundamentals, favourable demographics, high domestic savings, focus on infrastructure and continued urbanization will boost the demand of residential real estate.
The time correction is underway for past 2 years and may continue for another 1 – 2 years. The recent rate cuts should augur well for the real estate sector as it translates into an eventual reduction in mortgage rates; and with economic revival expected to improve buyer affordability, residential sales shall resume its upward trend.
Equity / structured debt at pre approval stage with 6-7% p.a. higher returns as compared to debt at post approval stage provides better risk adjusted returns as approval timelines and risk has reduced over the last couple of years.
Direct vs Indirect Investing Real estate sector across India is going through a sluggish phase. The trend, expected to continue for some more time, may reverse as the economic growth gathers momentum and interest rates decline further. Investment through Fund provides multifold advantages as compared to direct investment.
Outlook for Indirect Investing
Equity Transactions: Going forward, while the near term outlook for real estate is not very encouraging, the sector has the potential to witness good growth as the economy revives and interest rates decline. In the current market scenario, equity transactions provides an opportunity to partner with Grade A developers and may result in much higher IRRs as compared to debt transactions where upside is capped.
Mezzanine Transactions: Mezzanine transactions at land stage shall continue to be a preferred way of investing capital. It provides regular coupon and debt like securities along with an equity kicker. While this structure was uncommon couple of years ago given significant approval risk, this space is going to be more crowded as approval process has become relatively simplified and newer funds shall start investing through this structure.
Debt Transactions: As interest rates decline, investment under this structure is going to become unattractive. Yields under this structure is also expected to contract as there are numerous players (Banks, NBFCs, HNIs) operating within this structures. Full marginal tax applicable on the interest earns makes it even more less rewarding as compared to equity / mezzanine structure.
The emerging trends
Residential segment to witness challenging times over next 12 – 18 months – Time correction Underway. Commercial sector witnessing revival; lack of new supply might lead to rise in rentals. Amongst major cities, Bangalore is leading the pack in terms of absorption; demand is primarily driven by booming e-commerce companies and affordable prices. Luxury segment witnessing maximum pain; High price in cities like Mumbai has made most of the properties out of reach for majority. In terms of FDI, there is a huge demand for completed office assets; Blackstone has become the largest owner of office assets in the country, with nearly 32 million sq. ft of office space across cities including Mumbai, Bengaluru, NCR and Pune.
The government focus towards housing has increased over the past 1 – 1.5 years. Few announcements made are Housing for All by 2022, Development of 100 smart cities, Real Estate Bill and FDI norm relaxation.