Business Description
Nothing is truer about Indians than their love for owning properties. But the biggest myth that needs to be busted is that the real estate sector is a homogeneous one-dimensional sector. Instead of looking at real estate as a whole, it should be seen from the lens of asset classes.
Residential, commercial, retail, hospitality and industrial/warehousing are the asset classes that make up the real estate sector. Each should be seen separately when planning an investment over the short, medium or long-term. One should also look at micro-markets in each asset class to make a profitable decision.
The first step is to not generalize the sector or how it is performing. Every asset class acts and behaves differently based on market factors and inventory available during any given year.
Residential -
Residential real estate has been sluggish for the last 12-18 months, more so since RERA, GST and demonetization marred the sector and credit availability. Demand is slow in smaller markets and buyers are gravitating towards bigger developers as the business shock is absorbed by big players, slush with funds to tide over the slump. This has led to massive consolidation in micro markets.
NCR and Gujarat were severely affected as they were cash-dependent markets. Chennai and Bangalore markets are standing firm due to their transparent financial transactions and lower rates. Mumbai markets have remained flat as a whole due to several regulatory changes.
The whole residential market is facing a tough time in India. There is an oversupply, and massive reforms in the sector have buyers shying away. The mutual fund asset class has gained momentum recently, where personal savings are going to mutual funds and equity markets, cannibalizing investment in residential real estate. We expect the sluggishness to continue for at least the next 12-18 months.
Commercial -
This sector has been going strong for the last three to four years. More global funds have been buying completed ready commercial real estate portfolios in India which has pumped fresh capital into the system. They are currently leasing out offices at 8 to 9 percent interest rates.
Markets like Hyderabad, Bangalore, Chennai and at some level, Mumbai are doing well in this sector. The reason why they are successful is that global funds want to buy yield and rent-generating assets. Many commercial projects are being taken over by global firms who are listing these assets as a real estate investment trust (REIT.)
Commercial real estate is having a strong run but its bullishness will slow down in the next 2-3 years as the inventory list availability increases in micro markets.
Retail -
Global funds have been chasing retail recently. The retail sector has been on the downward spiral since 2010 with numerous malls going empty. There has been an upward tick in this market in the last 12-18 months with retail-focused funds coming from global conglomerates. Abu Dhabi Investment Authority backed Lake Shore, New York’s Blackstone, Singapore’s GIC and Canada’s CPPIB, Xander and more are infusing some much-needed capital into the sector, owning and operating in the retail sector. Even though it was sluggish till 2016, policy reforms, ease of doing business, increasing disposable cash and globalization will transport this sector to greener pastures.
The resurgence of the retail asset class is here and it is raring to go.
Hospitality -
This asset class has been having a tough run in the last five to seven years. A lot of hotel chains are struggling and the occupancy is not strong enough due to the oversupply of hotel rooms. The hospitality industry needs high capital to buy assets - there is news of Brookfield AMC buying the Leela chain for Rs. 4500 crores. We don’t expect much to change and it’ll be tough for this sector in the coming few years.
The market has become more competitive with the rise in the sharing economy and players like Airbnb. This asset class, unfortunately, will continue to struggle because of significant oversupply and heavy capital requirements.
Industrial and Warehousing -
The industrial and warehousing sector is a promising space. GST brought a positive tailwind to the logistics sector. Global industrial logistics experts are showing interest in this market. The investment of companies like Hong Kong-based e-Shang Redwood in this space is making this unorganized sector become more institutionalized. The burgeoning e-commerce sector has helped the warehousing sector and will continue to do so. Capital is chasing this sector and it would be worth keeping an eye on this space.
It would be wise to not see the real estate sector in isolation and understand that the climate is not the same as before where you could buy a property, flip it in a couple of years and make a neat profit. Tread with caution and research the asset class you’re interested in before investing.
