Investing in real estate can protect you from inflation
In the last economic boom, tier-2 cities saw a lot of speculative activity, but the demand was not genuine, Pranab Datta, vice-chairman and managing director of property consultant Knight Frank India, tells Pritam P. Hans.
Knight Frank India Vice-chairman Pranab Dutta
In the last economic boom, tier-2 cities saw a lot of speculative activity, but the demand was not genuine, Pranab Datta, vice-chairman and managing director of property consultant Knight Frank India, tells Pritam P. Hans.
How is the environment in the real estate market?
The residential property market is going through different experiences across the country. In the last one year, property prices have appreciated astronomically. On one side, builders are being squeezed due to lower availability of capital, that too at very high rates, and on the other, the demand has nose-dived. It is a situation of low volumes and high prices.
If the demand for properties is low, why are prices still high?
Typically, developers are averse to reducing prices, because if they have sold stock at higher prices and then drop prices overtly, it may have an impact on the sold stock. If you change development control rules and allow higher FSI (floor space index, or the ratio of built-up area and the plot), then prices may cool down. But it is not happening in cities like Mumbai. Where there are no FSI restrictions, like in Hyderabad, you don't see prices rising as you can go to up to four-five FSI. Everybody is waiting for a 15-20% correction before entering the market.
Residential properties are becoming costlier. Do you think there is a need to focus on affordable housing?
In affordable housing, which is different from low-income housing, we are looking at homes in the range of Rs 15-50 lakh. In cities like Mumbai, the cost of land makes affordable housing impossible. You can do it in the suburbs and cities like Pune, Kolkata and Chennai. Form the developer's perspective, the conditions have to be congenial, so that the project can be turned around fast to keep costs under control. There are a lot of developers in the South who are doing that by completing projects in 8-9 months.
In the current market scenario, what would your suggestion be to someone who wants to invest in property?
In residential properties, you invest not for the yield but for appreciation, because the yield is just 2-3%. Appreciation in the real estate market will happen if you have a long investment horizon. Commercial properties give a yield of 10-12%. You also have private equity funds which offer rental yields to investors. If REITS (real estate investment trusts) are allowed in India, that will add depth in the real estate market. If you have disposable income, it is good to have exposure to real estate apart from your own house, as it serves the dual purpose of investment and hedge against inflation.
Which cities would you suggest for investment in the real estate market? Are small towns good investment destinations?
The Delhi-National Capital Region is a good place to invest. Cities like Pune, Chennai and Bangalore, which have industries and good economic traction and a lot of floating population, are ideal places for investment in residential properties, as you can lease out easily. In many tier-2 cities like Jaipur and Nagpur, a lot of speculative activity took place between 2003 and 2008, but the the underlying economy did not change much. So, the demand was not genuine. These markets should ideally be left for people living there.
How is the environment in the real estate market?
The residential property market is going through different experiences across the country. In the last one year, property prices have appreciated astronomically. On one side, builders are being squeezed due to lower availability of capital, that too at very high rates, and on the other, the demand has nose-dived. It is a situation of low volumes and high prices.
If the demand for properties is low, why are prices still high?
Typically, developers are averse to reducing prices, because if they have sold stock at higher prices and then drop prices overtly, it may have an impact on the sold stock. If you change development control rules and allow higher FSI (floor space index, or the ratio of built-up area and the plot), then prices may cool down. But it is not happening in cities like Mumbai. Where there are no FSI restrictions, like in Hyderabad, you don't see prices rising as you can go to up to four-five FSI. Everybody is waiting for a 15-20% correction before entering the market.
Residential properties are becoming costlier. Do you think there is a need to focus on affordable housing?
In affordable housing, which is different from low-income housing, we are looking at homes in the range of Rs 15-50 lakh. In cities like Mumbai, the cost of land makes affordable housing impossible. You can do it in the suburbs and cities like Pune, Kolkata and Chennai. Form the developer's perspective, the conditions have to be congenial, so that the project can be turned around fast to keep costs under control. There are a lot of developers in the South who are doing that by completing projects in 8-9 months.
In the current market scenario, what would your suggestion be to someone who wants to invest in property?
In residential properties, you invest not for the yield but for appreciation, because the yield is just 2-3%. Appreciation in the real estate market will happen if you have a long investment horizon. Commercial properties give a yield of 10-12%. You also have private equity funds which offer rental yields to investors. If REITS (real estate investment trusts) are allowed in India, that will add depth in the real estate market. If you have disposable income, it is good to have exposure to real estate apart from your own house, as it serves the dual purpose of investment and hedge against inflation.
Which cities would you suggest for investment in the real estate market? Are small towns good investment destinations?
The Delhi-National Capital Region is a good place to invest. Cities like Pune, Chennai and Bangalore, which have industries and good economic traction and a lot of floating population, are ideal places for investment in residential properties, as you can lease out easily. In many tier-2 cities like Jaipur and Nagpur, a lot of speculative activity took place between 2003 and 2008, but the the underlying economy did not change much. So, the demand was not genuine. These markets should ideally be left for people living there.
