Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India
With gold prices currently on the descent, many investors are asking themselves if residential real estate prices will follow. Gold and real estate are the two primary investment routes for retail investors in India, so this is definitely a valid question to ask. The performance of residential real estate as an asset class is doubtlessly dependent on the macro-economic factors that also dictate the performance of other asset classes, including gold. Nevertheless, the correlation between gold and real estate prices is not as distinct as one may at first assume.
Price movements in the real estate sector are the result of supply and demand. This is true for gold as well, but the demand drivers for real estate are not the same as for precious metals. Though, in investment terms, they technically fall under the category of asset classes, the demand for residential property stems from the desire for home ownership that is hard-wired into the Indian psyche. It is demand from end-users that dictates investors’ appetite for residential property.
In India, precious metals are an investment class that most people will consider after this basic desire is satisfied. Moreover, the prices of precious metals are not location-specific – they rise and fall uniformly. This is hardly the case with real estate, which performs differently at different times in different cities and micro-locations. In a vast country like India, it stands to reason that various markets will display varying pricing dynamics. Real estate valuations also range from rational to irrational in different areas within the same cities, depending on the levels of supply, demand and investor activity. At the same time, other cities continue to remain uniformly rational because they are largely end-user driven.
How Good Is Residential Real Estate For Investment Today?
There is no one-size-fits-all formula for the viability of residential real estate as an asset class for investment. Different investors have different levels of expertise, experience, market knowledge and risk appetites when it comes to different asset classes. Those with insufficient expertise in stock trading are not likely to see satisfactory ROI from their activities on the stock market. Likewise, investors who lack the requisite knowledge and research to make winning real estate investment decisions will not meet with much success in this vertical. Real Estate investors who have sufficient market knowledge or work with experienced real estate consultants will not fail to see lucrative returns on their investments.
Three parameters for successful investment in any asset class are when to invest, how much to invest and when to exit. In real estate, three additional variables are where to invest, into which size and configuration, and in which location.
Residential Real Estate Investment – Short-Term & Long-Term Outlook
In the short term, residential real estate prices in different cities will either remain steady see minor upward or downward fluctuations. In the long term, they will rise again. The fundamentals of the India real estate story are extremely strong. Even in this turbulent economic environment, India remains the cynosure of interest by global MNCs and investors who see the limitless potential of a young, growing economy, a wealth of highly trained workforces across the manufacturing, IT/ITeS and services industries. All this translates into assured job creation, and therefore demand on the residential real estate market.
However, Indian residential real estate is definitely not the best route for short-term investors. When it comes to opportunistic trading, gold is doubtlessly a far more suitable asset class – not least of all because one can purchase it in small or large amounts and liquefy it quickly. Turning a profit with gold is really only a matter of timing the market.
Of course, this applies for residential real estate, as well. However, thanks to a conservative banking system that makes ‘flipping’ extremely unattractive, residential real estate as an investment class is a very different ballgame in India. More and more regulations are being brought in to subdue the appetite for speculation in this sector. Also, the lowest entry point is definitely much higher than for gold. Finally, it requires a minimum ‘incubation’ period in order to bring ‘appreciable’ returns.
Even after one has satisfied all the basic investment criteria – good location, right size and configuration, right entry point and right entry price – one needs to stay invested for the mid-to-long term in order to garner the best possible returns. As a general yardstick, an investment horizon of 3-5 years is ideal.