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Black swan moments in India’s real estate sector: Why should you invest now?

real estate, real estate in India, real estate investment, Black swan moments in India's real estate sector, RERA, demonetisation, gold, equity, home buyers

We all know somebody who has made a mini fortune by investing in a flat or residential plot at the right time. So, there is no doubt that investment in real estate will always prove to be progressive. Despite the usual ups and downs, there exists a deep-rooted fact that residential property is a sure-fire investment which delivers excellent returns.

Any asset class — be it realty, gold or equity — has its own cycle and no asset class gives positive returns forever — it needs to be seen from the lens of requirement. Nor will it constantly give you a negative return. The reason low returns are expected from real estate is because too many changes have happened from regulatory standpoint and hence buying decision is conscious.

Black Swan Moments

The overall market was going through a bearish phase when it was impacted by two major 'black swan' events. In May 2016, the Real Estate (Regulation and Development) Act or RERA was enacted. And six months later, the government demonetized high-value currencies. This is so because of the difference between the circle rate, which is fixed by the government, and the market rate of properties. Initially, there was a setback, but once again cash is back in the market. However, the magnitude of cash proportion has changed.

On another front, only a few states have implemented RERA effectively; many have diluted the key provisions of the Central Act. These dilutions include exempting a majority of under-construction projects from RERA's purview as well as easing penalties for builders who do not comply with the Act. It is expected that homebuyers or investors will also wait for things to settle down. Effective implementation of RERA is important to restore confidence among homebuyers.

The Investment Scenario

Total assets under management by assets management companies (AMCs) as of 31 May 2018 was about Rs 22.6 trillion. On 31 May 2013, this figure was about Rs 8.68 trillion- that's an average year-on-year increase of 21%. During the same period, hybrid equity- oriented funds had given an average annual return of 16% and liquid funds around 8% per annum.

At best, one should invest in real estate for diversification-irrespective of the low returns. Equity is highly volatile, whereas real estate is not that volatile. We must understand that real estate is cyclical in nature. In the present scenario, if you have a horizon of about 15 years, you can go ahead and invest in real estate.

(By Manju Yagnik, Vice Chairperson, Nahar Group, and Vice President, NAREDCO (Maharashtra)