How Will Real Estate Investments Perform In Fy2022-23

By Author: Dynamix Group
Total Articles: 23
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Investors and buyers often draw a false equivalence between real estate and a financial asset. Real estate assets are lumpy, require large capital commitments from their buyers (often over a period of time) and are illiquid.

Unlike tradeable financial assets on indices, there are no clearing houses for apartment buyers and sellers, and there are no regulated and institutionalised conventional ‘market-makers’.

At a measurable level, the price of a home is a function of a macroeconomic factors, micro-market conditions, geopolitical issues, commodity prices and governmental policy. It is important to note that the home is – for most – the single largest purchase one will make in their life.

It is an asset which has both, inherent value – you live in it – and financial value – it can earn you money and preserve your wealth. For the latter reason, most buyers of real estate have historically tended to be somewhere on the continuum between end user and investor.

The current real estate market across Mumbai and the Mumbai Metropolitan Region (MMR) is extremely vibrant. It is seeing renewed ...
... interest from buyers at both ends of the end-user-investor continuum. 2013 to 2018 saw a soft market on account of deep changes and shocks – demonetisation, the introduction of the Goods and Services Tax and the Real Estate (Development and Administration) Act, the NBFC Crisis and changes to Mumbai’s Development Control and Promotion Regulations.

Sales slowed as the sector found a new equilibrium and the clearing of stock of oversupplied luxury residential units put pressure on prices. New launches therefore slowed. Between 2019 and 2021 Mumbai and the MMR continued consuming an average of 29,530 units per quarter, whilst new supply was restricted at 24,300 units per quarter. This brought the inventory overhang down front a peak of 38 months (Q3CY2017) to 17 months today.

Wages continued to increase, enhancing profitability. This, coupled with governmental action – lower interest rates (enhancing affordability) and governmental incentives (enhancing affordability and profitability), took the sector from being in a self-reinforcing vicious cycle, to a virtuous one. This saw home purchases increase dramatically, with supply falling or stagnating. The ensuing result has been some price inflation.

FY2022-23 will be interesting in terms of real estate as an investment and asset class. New supply being brought to market takes time – and whilst there is a pipeline of supply expected, this will take at least the next 12-18 months to launch. This should keep demand for ongoing projects robust, and therefore prices firm. India is also seeing a bout of high inflation (the WPI was 15.08% last month). Geopolitical factors such as the war in Ukraine have had significant inflationary pressure on raw material prices, at a time when the cost of borrowing has gone up, as the RBI has raised its benchmark monetary policy rates to fight inflation.

Developers’ costs have increased substantially and some of this cost is being passed on to purchasers in the form of higher prices. Purchasers who have bought their homes when markets were slack – say during the pandemic or immediately thereafter – will have seen excellent returns on their investments. For those purchasing now, returns will continue to outperform as demand still outstrips supply. However, this could change in the medium term as high inflation hurts developer margins and stresses the financials of projects, potentially bringing distress.

Affordability can reduce as the RBI continues to tighten monetary policy and fixed low-rate mortgage tenors mature and move to higher floating ones. As inflation in consumer goods continues, real disposable income and savings can fall. These factors could dampen demand. And all the new project launches which are being planned now, as a result of renewed ‘animal spirits’ amongst developers could hit the market at the time when demand starts to slow, creating an environment reminiscent of 2015-2019.

But the opposite may well be true as well. Our economy is strong and whilst inflation is a challenge currently, it could well be transitory and is likely to abate with geopolitical crises (such as the war in Ukraine). The Government of India has recently announced a reduction in the rate of excise duty on fuel, with some states following suit.

A tariff on steel exports, lower duties on raw materials and a concerted effort to improve the availability of cement through better logistics will deflate prices and make the sector more efficient. It is also important to note that real estate went through a phase of heavy consolidation on account of regulatory change, change which made the sector more transparent for homebuyers and home-builders alike. This has structurally changed the way buyers look at home purchases, making investment in under construction property far more attractive than it once was.

FY23 will be a very interesting year for home buyers and sellers alike. Those chasing yield should carefully consider the nature of project, the renowned developer, the micro-market and overall sentiment before taking a call. If these factors are appropriately thought about, the purchase will be of high value – emotional and financial – to the owner. It is important however to realise that short term fluctuations are to be expected and these ought not to change one’s investment thesis.