Property has not been a very good asset class for investment, particularly for retail investors whose budget may be limited to under ₹1 crore, even as larger private equity players enjoy more options. Also, many of the macro indicators such as economic growth and job additions have not shown any signs of revival.

At the start of 2019, we predicted three trends — the revival of rental interest, higher share for branded players, and clearer buyer perception on whether their property purchase is an investment or for own-use, rather than a ‘jumbled’ purpose. Nearly all these trends did take shape, in varying degrees. We made no prediction of a revival in the market in terms of price and demand and it was certainly gloomy on those fronts.

For 2020, the market could see further implosion and, despite the prolonged pain, it may only get worse. That said, there may be no price correction as the cost economics — land, construction, capital and sales — may not come down substantially.

Product view

In the past, real estate was unlike any other product you would buy as a consumer. For example, a car or an appliance is bought as a finished product with the manufacturer putting in the money to make it showroom-ready. There is no opportunity to flip — book a car at the design stage and sell it once it is ready to be delivered — to earn short-term profits.

However, homes were sold from the time of launch onwards, and buyers took a risk in the purchase decision. Investors bought and sold homes for short-term profits, pushing up the prices. Developers were able to meet their cashflow needs from investors and buyers to complete the projects, reducing the need to borrow at higher interest rates.

This has been changing over the past few years and the home is now seen as a finished product for immediate use. Developers are waking up to the idea that they need to line up funds to complete the project, rather than hope to get early payments from buyers or investors. With the Real Estate (Regulation and Development) Act (RERA) imposing penalties for delays, there is a strong need for developers to ensure that they have enough resources to handle eventualities and ensure on-time delivery.

So, while some projects may see early bookings, similar to pre-bookings for new car models, the norm in the future may be buying a completed or a nearly completed home to move into immediately.

Financial instruments

We will also likely see more interest in products that are derived from property. For example, Real Estate Investment Trusts (REITs) drew tepid interest when first mooted. One reason was the higher market interest rates vis-à-vis the low returns expected from REITs. However, with a slew of rate cuts denting returns on one side and commercial property yields inching up on the other, REITs can be an attractive option for investors.

There are also other products such as fractional property ownership, where people can invest smaller amounts to own a portion of an asset. These can also be transferred (though liquidity may be very tight) to other buyers without high transaction costs.

This, and other such financial instruments that are derived from property assets, could see more traction in the market. The advantage is that it can open up many options with various risk-return profiles that can cater to the needs of different investors.

Organised rental play

There is also a shift towards more organised play in the rental market; 2020 will see this trend strengthen further. With low rental yields in the residential market and large capital needs in the commercial space, there is a need for scale and innovation to bring in more value and earn returns. Larger players can bring that as well as standardised features and amenities. If they own multiple or larger-sized assets, these conveniences and services can be offered at reasonable rates due to economies of scale. As a result, small players such as individual owners may be nudged out by corporates.

The rental market is likely to expand, as the capital appreciation potential of homes is falling and renting is seen as a better option than owning in nearly all major cities. In the commercial segment, many corporates have moved away from owning their offices to renting them, and now there is a shift to co-working spaces. These trends will enable asset owners to offer better services and earn decent returns.

Also, proposed regulatory changes such as the Model Tenancy Act will help make the rental market more investor-friendly. The rules will help bolster the legal rights of owners and early dispute resolution, making it more attractive for players to buy a property and let it out.

The author is an independent financial consultant.

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