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Is Indian real estate still a profitable investment?

For instance, co-living units can offer as much as 8-11% of ROI – a much higher yield than the current average yield of 1-3% in garden-variety residential properties. How many investors are gauging the intricate variances that drive returns on investment in Indian residential real estate, and how many are just going by the old thumb rules?

There are immensely profitable asset classes in Indian residential real estate investment, but far too few investors are actually scanning the radar for them.

Commercial Real Estate Beckons Wealthy Investors

In earlier years, most small ticket investors banked heavily on residential properties for their investments. Today, wealthier investors are eyeing commercial properties and ‘sunshine’ sectors like warehousing. Also, REITs (Real Estate Investment Trusts) have finally kicked off in India, and commercial real estate is attracting a lot of attention from real estate investors.

The recent oversubscription of the Embassy-Blackstone REITs definitely sends out clear signals to global as well as domestic investors – it’s a good time to grab a piece of the Indian office property pie. In fact, we expect REITs investors to become more bullish and eye stakes in multiple Indian commercial assets which may be listed under REITs in the future.

In REITs, small-time investors rightfully sense the unveiling of a major new investment avenue comparable to that available in more developed nations. Meanwhile, Indian commercial properties are drawing a lot of interest from big-ticket investors. This segment has performed much better in India than its housing segment over the last few years.

Housing sales across the main Indian cities have stayed subdued, especially after demonetization (DeMo), the implementation of the Real Estate (Regulation and Development) Act, 2016 (RERA) and the Goods & Services Tax (GST). Meanwhile, commercial office leasing ROI increased y-o-y.

Residential – Down, Not Out

In the past, a lot of investors made a killing on Indian residential property – in short periods – by timing the purchase and sale of housing units. Were they wrong about their investment approach, or were they wrong about their chosen asset class? Certainly, given the rebooted regulatory environment and existing strictures that prevent ‘flipping’, speculative short-term investment in the Indian housing sector no longer makes sense.

To realize 8-10% annual returns or more today, housing investors must have a horizon of at least 5-7 years. Meanwhile, they can earn rental income from an asset that has perennial inherent demand.

In developed countries with organized property markets, alternate residential real estate investments done for the long-term have earned returns on par with those of equity and mutual funds – with far less volatility. India is currently on the path of such organization, with rapidly increasing transparency, governance and discipline. There are much better times ahead.

For now, Indian housing prices will remain at status quo. In the future, the pent-up demand of more than 10 million units will hold sway and drive up the rental and capital values of all but the most ill-chosen housing. From urban to suburban and from peri-urban to rural areas, the inherent demand for housing – and the potential returns on investment – is beyond question.

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