Reality of Realty has changed: How to invest in the future

Has Covid-19 changed the real estate market forever? And should you be changing your investment strategy during this pandemic? You are not alone in asking these questions; hundreds of articles can already be found on the Internet on this subject. But before you make any investment decisions based on Covid-19, here are the REAL questions we must understand: ‘Is Covid-19 the only reason real estate has changed so much?’ And ‘What will the property market look like in the future, beyond the pandemic?”

There’s no doubt that the Covid-19 pandemic has hit the real estate market hard, particularly residential properties. Thanks to the pandemic, residential sale values fell by 7% in 2020, while demand declined by 25% due to the mass reverse migration out of metro cities. While the slowdown in 2020 has not gone unnoticed by anyone, not everybody has spotted the fact that Covid-19 is not entirely to blame — in reality, residential realty has been falling rapidly over the past decade.

From dream investment to nightmare

Those who have invested in property since before the early 2000s will remember 2004-2008 as the golden era when returns were as high as 60% for the five-year period. Yearly returns experienced a sharp fall to around 23% in the previous decade, but this could still be considered a handsome rate of return. Cut to 2020, when the one-year return took a nosedive to 2.8%. If you think this was merely the effect of the Coronavirus, you’d be wrong. Residential returns have been languishing at 5.5% per year since 2015, long before Covid-19 came into existence.

If we crunch these numbers, this is what it would give us: A ₹20 lakh apartment would have given a return of ₹4.6 lakh in 2011. Today, the same house will give a mere ₹56,000 for the entire year. Once you deduct the maintenance charges and property tax, and also account for inflation, very little profit would remain.

Residential property was already plagued by a slowdown in the past five years, following demonetisation, the implementation of the Real Estate [Regulation and Development] Act (RERA) and the Goods and Services Tax (GST). What the pandemic has done though, is make the problem worse: people migrated back to their hometowns, leaving property owners without steady rental income; new projects were stalled due to lockdown and the ensuing manpower shortage; developers were left with major cash crunch and liquidity issues and as a result, many constructions are delayed.

Data shows that as many as 1,665 RERA-registered housing projects across India have been delayed by over five years. Property consultant Anarock projected that nearly 4.66 lakh under-construction homes scheduled for completion in 2020 could be delayed, while 4.12 lakh homes scheduled for handover in 2021 might not meet the deadline either. The number one reason for these delays year after year — aside from Covid-19 — is that many developers have over-leveraged themselves and as a result, have been facing liquidity issues. But this has had a major impact on buyer sentiment; customers who once considered property to be a safe bet, are now experiencing discomfort and loss of trust as their money is stuck in delayed projects.

Best bet: Fractional ownership of pre-leased commercial asset

Even as the sun sets on residential property — for a few years, at least — it is rising rapidly on commercial real estate (CRE) in India. While residential realty has been falling since the global financial crisis of 2007-08, commercial real estate has been growing year after year in India. Last year, gross leasing of office space increased by 25% to an all-time high of 61.6 million sq ft, according to property consultant CBRE.

Commercial property has long been considered an investment only for the rich, due to the high entry barrier. But small-ticket investors are quickly picking up interest in this high-return asset class thanks to the concept of fractional ownership. Instead of one wealthy investor pouring in, say, ₹100 crore for a Grade A commercial property, fractional ownership allows 10 people to make a more affordable investment of ₹10 lakh each, sharing the ownership and dividing the risk as well. This is what hBits specialises in, offering retail investors the most profitable, premium properties that are pre-leased and high in demand.

Indian realty on the rise

While commercial realty witnessed a slight slowdown during the early months of the lockdown this year, it quickly picked up pace again in Q3. As the economy reopened, net absorption increased by 63%, while new completions grew by 59% when compared to the preceding quarter. In fact, during the pandemic, premium commercial real estate — comprising Grade A office spaces that hBits specialises in — was the only property category that did not take a huge hit during the slowdown, particularly in India.

Read: Pandemic-proof Real Estate & Financial investment post-Covid-19 : Fractional ownership

The fact that India’s commercial property market continues to thrive during the pandemic is something that has drawn the attention of many international and NRI investors, with other countries not faring as well. The CBRE recently reported that average rents in the US commercial sector are expected to fall by 6%, with similar drop of 3%-5% in rental returns in major European cities such as London, Dublin and Stockholm as well. On the other hand, in the same report, CBRE states that office leasing continues to grow in India due to its strong outsourcing sector. This is the reason why US and EMEA-based companies account for more than 63% of office space leased in India (100 million sq ft and 40 million sq ft respectively).

In Dubai, rent has dropped by as much as 10%-20% year on year, depending on location. Compared to this, major cities in India have shown positive growth of 5%-12% in commercial real estate in the last few years.

How fractional ownership is different from REIT

Demand for Indian commercial real estate is also evident in the recent over-subscription of India’s first REIT (Real Estate Investment Trust) last year, raising ₹4,750 crore (US$ 679.64 million). While this robust response clearly demonstrates to investors — domestic and international — that the Indian commercial property market is ready for bigger and more players, REITs have their own disadvantages as well. The concept of REIT is similar to that of mutual funds, pooling money from many investors to purchase or finance income-producing properties, including both residential and commercial realty. The returns paid to investors come from the monthly rents, so there is a steady flow of income.

However, unlike fractional ownership, REITs do not offer much by the way of capital appreciation. And similar to mutual funds, REIT investors cannot choose the particular properties that their money is poured into. Fractional ownership, on the other hand, provides complete control of both, asset selection and diversification. Over time as well, investors gain from both regular rental yield, as well as study capital appreciation.

hBits ensures that investors enjoy complete access and transparency when it comes to their properties. All the information is live and accessible at the click of a button on the hBits digital platform. Not only can investors take virtual tours of the property, but they can also securely buy and sell their share of the property on the same platform. In addition, hBits only offers the best Grade A commercial properties that are completed and pre-leased, reducing the risk but ensuring high returns, unlike REITs, which invest in all kinds of properties. With this win-win formula of low risk and high returns, fractional ownership can be said to be similar to debt instruments and term insurance, while REIT is most similar to mutual funds, which can offer good returns but can also be more volatile.

Changing future of realty

In conclusion, the Indian real estate market is changing rapidly, regardless of the Covid-19 pandemic. Over the next decade, as residential values stagnate, more and more individual investors will see the benefit in the growing commercial real estate sector. hBits is at the forefront of this revolution, giving investors the convenience of fractional ownership of pre-leased commercial assets.