Personal Finance

What home buyers can bet on in 2019

Meera Siva | Updated on December 30, 2018 Published on December 30, 2018

Trends building up in the housing market could provide good opportunities

Buying a new house may not be a top New Year wish or resolution for many, given the state of the property market. It is not just that the past was troublesome, but the future also seems bleak with no light at the end of the tunnel.

But it is such markets — in which there is high apathy in a segment — that offer new opportunities that can pay off when things turnaround eventually.

Rental revival

One theme to consider is the rental market for earning returns. This might sound like a terribly bad idea as the Indian property market has so far been a play only on capital appreciation and never on rental returns. Property prices have been appreciating at a fast clip and have been sky high. Rents have been moderate, keeping pace with inflation.

The net result is that rental yields have been low. In most cities, it is typically under 3 per cent for residential properties and 8-10 per cent for commercial spaces. Hence, any calculation on whether it is better to rent a house or own one, invariably shows that renting is a better option, unless capital appreciation is over 10 per cent and you stay for 10 years.

Owners also find renting out a house a hassle, as there are not many property management firms to take care of tenant requirements. The legal rights of owners are also not very strong and violation of terms by renters is not easy to handle. So, buying to rent out has not been a popular option.

This is starting to change, and the rental segment is expected to become more institutionalised and attractive in the coming years. In the office segment, co-working spaces are redefining the rental market. Co-living, managed rental and home-stays are becoming more popular and there are more service providers in this segment. Home owners will have fewer hassles to manage and can also earn better return on their assets with quality managed spaces.

Also, with nearly zero price appreciation in the property market, many potential buyers are turning renters. And with the population demographics of many young people who are mobile, renting out could become more attractive.

Data from show that rental yields in many cities improved in the July 2017-July 2018 period. In cities such as Ahmedabad and Chennai, rental yields increased by 0.7 and 0.4 percentage points to 4.2 per cent and 3.6 per cent, respectively. This trend would likely continue.

Investment view

Another shift is in how buyers view property. Typically, a buyer viewed a house as an investment as well as a product to use. This dual view often led to settling for sub-optimal solutions.

For example, it was like buying an endowment policy rather than taking an insurance term cover and investing in a good mutual fund scheme.

As a buyer, you may want to look at a house either as a place of stay or as an investment. And when investing in a property as an asset class rather than for end-use, you will also find there are more options beyond buying a house. One option is buying land. Another is to look at indirect investments in properties. You can consider these to address two main current disadvantages — illiquidity and lack of transparency.

For example, as rental yields improve and interest rates moderate, Real Estate Investment Trusts (REITs) are an option you can consider. There are already a few unlisted REITs, which are partial property ownership options. As this segment develops, you can also look at office space, retail or residential REITs, which offer different risk-return trade-offs.

Real-estate-focussed Alternate Investment Funds (AIFs) are also another option for those with a larger corpus. These funds offer debt/equity to developers, and a few have been quite successful in giving over 15 per cent or more internal rate of return (IRR). These products help you build a portfolio of investments that moderate risk.

Brand value

The housing market will also see consolidation and flight to quality. Unlike the past, when there was no entry barrier to become a developer, you will find fly-by-night operators disappearing. Without a strong balance sheet and limited ability to raise funds, many small-time developers will struggle. And with low investor interest to fund these projects and limited access to institutional lenders, only the strong players will be able to survive.

One can hence bet on developers that have been able to deliver quality products on time and have the financial strength to withstand any shocks in the system. These brands, however, may charge a premium over smaller developers. But, over the long run, lower maintenance cost and better resale value may justify the higher upfront payment. Brands are also likely to deliver better service; this is particularly important in specialised housing segments such as senior living.

The writer is an independent financial consultant

Published on December 30, 2018

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