With the economic recovery picking up pace and attractive home prices, analysts say it is a good time for investors to put in money in stocks of real estate companies. Those who have spare funds and are looking to invest, buying a residential property now can is also be a good option from a long-term perspective. However, the return expectation of investors from these two asset classes should be realistic, especially from the stock market perspective, given the sharp run up in these counters since their March 2020 low.
Over the past two years, residential real estate has been primarily driven by end-users. According to ANAROCK Property Consultants, investors accounted for just about 20 per cent of the overall buying activity. Over the years, implementation of the Real Estate (Regulation and Development) Act implemented in 2016 combined with other shocks such as demonetisation, the introduction of GST and now Covid-19, has led to a consolidation in this sector.
“The stage is set for investors to get active again. However, the days of reaping fast and massive profits from real estate are over. Investors must come to the market with more realistic return on investment (ROI) expectations. Short-term speculative real estate investments are neither viable nor profitable anymore. With housing prices remaining range-bound over the past 7-8 years, the pickup in demand will eventually cause prices to harden again. A suitable investment horizon for Indian housing is 5-10 years,” says Prashant Thakur, director and head of research, ANAROCK Property Consultants.
Property prices, too, have seen a gradual rise over the years. In the eight major metro cities in India – National Capital Region (NCR), Kolkata, Mumbai Metropolitan Region (MMR), Pune, Hyderabad, Chennai and Bangalore – average property prices have moved up in the range of 2 per cent to 38 per cent between 2013 and 2020, ANAROCK data show.
On the other hand, sales of residential units across eight major Indian metros, according to Knight Frank, reached pre-Covid levels at 61,593 units in the December 2020 quarter (Q4’CY20). On average, these cities had recorded total sales of 61,467 units in 2019.
On its part, the government has also been proactive. Mumbai, for instance, reduced stamp duty rate from 5 per cent to 2 per cent for the period from September 1st 2020 till December 31st 2020, and to 3 per cent until March 31st 2021. Last week, the Delhi government slashed circle rates by 20 per cent for all categories of properties for the next six months.
“Many areas had seen market rates go below circle rates, which was hampering transactions. Complications like the difference between the lower market rate and the higher circle rate being added to the buyer’s income and taxed at the marginal income tax rate was a deterrent. Lower transaction costs will certainly incentivise buyers towards looking at opportunities” said Mudassir Zaidi, executive director (North) at Knight Frank India.
At the bourses, most realty stocks have done exceedingly well since their March 2020 lows. The Nifty Realty index has outperformed the Nifty50 index, rising 100 per cent as compared to 91 per cent gain in the frontline index. Among individual stocks, Sobha, DLF, Godrej Properties, Brigade Enterprises and Indiabulls Real Estate have gained in the range of 100 per cent to 223 per cent during this period.
In this backdrop, analysts suggest investors remain selective on realty stocks and buy only where there is revenue visibility and a credible promoter backing. “One cannot paint the entire sector with the same brush. The returns over the past few months in realty stocks have been phenomenal. Investors need to be selective now,” cautions G Chokkalingam, founder and chief investment officer at Equinomics Research.