Being euphoric about one’s residential real estate investments may sound fairly justified. While intending buyers decry the rapid rise in real estate prices, investors are on Cloud Nine. It’s actually quite interesting to note how the same people who first complained about how expensive homes in India have become go on to exult about how nicely their properties are appreciating once they have bought them.
This fact is quite interesting from a human psychology point of view – however, we are not discussing psychology but real estate. The simple fact is that investment into residential real estate is today the wisest route that a retail investor can take.
Most people do not ask for relevant statistics or a comparative analysis of real estate against other asset classes. Nobody denies that hope, faith and belief are our ultimate assets, but investment into assets such as gold, silver, real estate, equity, bonds and mutual funds should be done with the head as well as the heart.
Show Me The Data
When it comes to equities, bonds, commodities and currencies, one can rely on global trends and domestic data to take investment decisions. Decoding data and trends into an investment strategy is the very basis of success in all asset classes. However, when it comes to real estate – the largest and most preferred investment asset class in India – smaller investors seem to rely almost exclusively on hope, faith and belief.
The information available to such buyers in India is usually fragmented, and its reliability for providing indications on ROI comparable to that of a satellite’s monsoon predictions.
Data points are crucial, but they become relevant only when they are backed by ground intelligence and based on multiple parameters. For instance, an interesting picture emerges when one considers how India’s young population is driving the consumption story. This story has, in fact, been driving most of the domestic business sectors for the whole of the last decade.
Cars And Property – Two Faces Of Consumption
In this light, let us consider the automobile market, which is certainly ‘driven’ by young, aspirational and demanding consumers. There are striking points of comparison between the automobile and residential property sectors. Volumes, features and price points are key similarities in both.
Sales in both sectors depend on the right sizes, configurations and price tags of the products. A reduction in the cost of borrowing – read interest rates on loans – has a direct impact on the buying patterns and trends in both sectors.
Back To Real Estate
Most research reports highlight factors such as over-supply and low absorption. Many find this worrying and take a cautious approach. Volume and supply trends differ from location to location, and market trends vary between cities. In other words, there is no way to generalize when it comes to property investment viability.
Cities with a high level of job creation continue to see high volumes of residential real estate supply and absorption. Cities with few or no economic drivers to spur the growth of employment fall behind, no matter what other factors seem to work in their favour. Earlier, Mumbai and Delhi attracted the most talent from rural areas. Today, cities like Bangalore, Hyderabad, Chennai, Pune and Gurgaon have taken lead positions and are all set to overtake Mumbai and Delhi.
IT-centric cities like Bangalore, Hyderabad, Pune – and to an extent Chennai – are now emerging as whole new residential real estate propositions. IT companies there are expanding their campuses dramatically. Recently, WIPRO announced the imminent launch of their new facility and headquarters of approximately 2.5 million square feet in Bangalore.
This facility will augment their existing campus, which already employs over 31,000 people. Trends and data points suggest that dynamics in these cities will be very different in the next few years.
With inflation and construction costs moving northwards, the price trends are changing dramatically.
The graph clearly indicates that supply trends in real estate have are in a state of flux. The supply of residential properties priced below Rs. 3000/sq.ft. is reducing markedly. From 43% in Q4 of 2009, supply in this segment will come down to 8% in Q4 2013. Meanwhile, supply in the price range of Rs. 5000-10000/sq.ft. is expanding.
On the surface, aspirational and affordability levels are driving such trends. However, smart residential property investment will mean identifying the right products priced below Rs. 4000/sq.ft. in key growth cities, as these are the best options. In cities like Bangalore, Hyderabad, Chennai, Pune and Gurgaon, one can still find good residential projects in this price segment for long-term investments and appreciation.
The time-related value of money and inflation are two key parameters that one needs to take into consideration. A careful study of the graph above and factors in the growing population, it is easy to see that intelligent residential real estate investment in India will definitely pay off over the mid-to-long term.
Om Ahuja, CEO – Residential Services, Jones Lang LaSalle India
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Nice Blog. Thanks for the Information.
Dear OM
What is your view on noida, raj nagar extention and gaziabad area? there are lot of properties available below 3000 range
In Noida, there are market drivers over and above job creation at play – namely superior infrastructure and affordability. Noida is absorbing investor demand from Delhi, where affordability plays important role for investors. For Noida, the extended growth corridors are Noida Extension and Noida Expressway. In these areas,
massive job creation will further fuel the demand for residential property for quite a while to come. Job creation is a major trigger in the residential real estate space.
You post is very knowledgeable! This will help many people to know about given data which shouldn’t be ignored in real estate!
Hi Om
What are your views on the real estate situation – residential in particular in Bangalore Electronic city vicinity?
Where is the growth going to come?
regards
Electronics City is an ideal investment location because it is a IT catchment
I am planning to invest into a property in Delhi (NCR) / Mumbai region not sure which one should I pick and what upper limit should I target for i.e. max I can put in is 1cr (but for that I will have to take loan from bank).
I was thinking of investing into long term projects like the ones that are starting now and target to finish in next 5 years time or so, the only reason is that it will buy me some time to arrange for money.
What do you suggest will it be a good idea to do that and what is the property market looking in next couple of years.
Dear Neeraj,
Both Mumbai and Delhi NCR have sufficient options for a budget of Rs. 1 crore. If it is below that, your options automatically get shunted to the further suburbs in either case. As far as when to invest – please do not try to time these markets. Prices will fluctuate but demand will remain high no matter how long you wait, and your budget would not get you too many options in two years’ time.
Hello Mr Om.
I am looking to invest in Mumbai with budget of 80L. But completely unsure if I should invest or wait..or should I invest in bangalore (which is my hometown)..
The other criteria is I may relocate to Bangalore anytime in 4-5 years..If I invest in mumbai, I may choose not to relocate at all..
Is property investment the best available option today?
Dear Praveen,
Both Mumbai and Bangalore are excellent cities for residential property investment. The best opportunity in either city would depend on variables such as personal preference and long-term career plans / investment objectives. I suggest that you contact us so that we can zero in on the best option for you. And yes, real estate is still the #1 investment route – but as with all other instruments, it must be calibrated with care
Om,
Excellent Article. In the graph you show that the percentage of property in the band Rs 2000-3000 has decreased from around 50% in 2010 to approx. 10% recently. However, there isn’t a similar trend for the Rs. 3000-4000 band. Would you say that some perecentage overlap is there because of inflation and rising construction costs?
Also, taking that into consideration what do you suggest should be a target rate (per sq.ft) for an apartment in Patna? and How do you see the prices varying especially with the economy of India slowing down and the instability with regards to the elections coming up?