Is today the right time to invest in Real Estate? – 2018 & beyond
Not a single day passes by when this question is not discussed amongst the HNIs and Investors community. Before we get to find an answer, let’s look back at the changes that have happened in the industry, over the past couple of years.
In generic terms, Real estate Industry was associated with terms like ‘Opaque, Murky, Cash, Unsafe’ etc.; which is is akin to painting the entire nature of the business with one colour – Black. At the outset, reality is not so. A few black sheep don’t make the entire barn dirty. All stakeholders in the RE industry don’t behave identically.
Mind you, an industry which has the potential to contribute towards almost 1/8th of the GDP of this nation, cannot be left ignored for long, both by the Government as well as the Institutional & HNI investors. Said that, let’s examine the systemic disruptions in India, over the past 2 years, which have suddenly exposed the soft underbelly of a $180 Billion industry.
- Benami Transactions (Prohibition) Amendment Act
- Demonetization (In Nov 2016)
- Real Estate (Regulations & development) Act 2016 (RERA)
- Goods & Service Tax – Inclusion of RE sector
- REITS & InvITs
While the above few policy disruptions may seem like radical changes, these have the potential for a more transparent & predictable business eco-system in the future.
“There’s no better example of the benefits of organized & regulated business than Mutual funds. From a market size of 2.00 lakh crore in 2001, it has grown to 24 lakh crores in 16 years” ~ Sandeep Parwal, MD, SPA Capital
India is acknowledged amongst the top 10 nations who’ve improved on their transparency index. Coupled with the fact that India has improved 30 places in the world bank ranking of ‘Ease of doing business’.
When we compare the Real estate industry in mature markets, one discerning factor that stands out is the widespread participation of the investor community. And investors like Conservation of capital & Predictability of returns. A country as widespread as India, with a captive consumption of all product categories of real estate, have very few HNI & Institutional participations. There are more than 15 new product categories which can absorb billions of Rupees of investment; these being the non traditional investment avenues of Housing, commercial office space & retail spaces.
As an example, let us look at just the warehousing & Supply chain Industry. It has the potential to transform the nation with faster connectivity, lesser wastage from farm to the plate and greater efficiency of money invested. E-commerce industry alone is a case in point with billions of investment across multiple cities in the country.
“Cost of inefficiencies alone accounts for >6% of the GDP in India, compared to some of the more developed economies like USA, France & Hong Kong. A more robust Logistics chain can save billions for the economy” ~ Sandeep Parwal
Institutional players have already secured a foothold in this opportunity; said that, there are ample opportunities across the country for the HNI audiences to join hands with institutional experts to explore investments into Land, Construction, management & operations in this sector alone.
Other areas wherein we are researching & exploring options is specialty housing, niche products & participatory investments. It would be our pleasure to share & discuss these ideas. Vanilla products yield Vanilla returns; look beyond the obvious if you seek your money to perform more efficiently.
The government has announced many policy initiatives like ‘Make in India’ which when triggered effectively, on a long term basis, would seek investment in billions which were hitherto not considered by the Investors, largely owing to the Opaqueness in the system.
Investee mindset is changing across the nation; no longer are developers & builders on a high horse. It’s an investors market, not a seller’s market. A more formal structure of absorption of investment is welcome. There is quaint respect for the the private investor. When represented well to both, it becomes a win-win situation. That’s precisely what we design & execute @ SPA capital.
The real estate industry has no option but to accept that it desperately needs an image makeover, and there is no better way than overhaul the business practices. Investor representatives dig deeper than usual, and undertake due diligence to safeguard their money. Hence, not every real estate project is found investment worthy. As we see the RE industry, this prolonged negative phase should bring about a consolidation soon. My personal sense is that there are far too many developers, who’ve grown from ‘Mom & Pop stores’, without any real addition to their competence of skill set. They may not make the cut, and either would be taken over (I doubt, though), OR perish. The associated risk was that the small investor would lose money. Some of the recent legal pronouncements from the judiciary exemplifies seriousness to safeguard the investment.
Investee companies are realizing the importance of brand equity & consumer confidence. In my humble opinion, most Real estate companies should stop calling themselves ‘Developers’ as they aren’t investing enough into any form of R&D into the products they are creating. They aren’t developing anything substantially path breaking, rather, merely furthering the cookie cutter strategy. Shouldn’t the RE companies think more like ‘Manufacturers’? These companies should only have two motives on mind – Create products which get produced at reasonable costs, on time without cost over-runs & deliver a profit to the shareholders & investors. Unless there is absorption of the real estate by consumers who see value for money, RE companies can’t have profitable operations.
Let’s address the subject now.
A $180 billion industry cannot do without substantial Public private participation, and large pooled investments. Legislation cannot be apologetic anymore, reasonable profits cannot be a bad word. We need billions in patient investment, which can only be generated through the predictability of policy & profits. It is our sense that the policy makers are seized of this fact and the much maligned socialist approach would be dropped.