Finance

Best time to buy a luxury home as prices will remain firm: Mani Rangarajan

While developers are unlikely to make significant price corrections, steps such as stamp duty reductions and circle rate adjustments could potentially drive some downward adjustment in prices.

Affordable housing has been a growth driver for the real estate market across Tier 1, 2 and 3 cities. In fact, over the last couple of years, affordable housing has accounted for more than 50% of launches and sales in Tier 1 cities. There is no doubt that this is a segment with massive growth opportunity over the next decade, says Mani Rangarajan, Group COO, Housing.com, Makaan.com and Proptiger.com.

Rangarajan also says that luxury housing has seen a comeback of sorts in the last 10-12 months owing to different reasons. The luxury housing market today is doing well and there is unlikely to be any significant price correction in this segment.

In an exclusive interview with Sanjeev Sinha, he shares his views on the current trends prevailing in the realty market in India, and its future outlook. Excerpts:

Do you see any kind of disparity being created in the major real estate markets of India in terms of price correction?

Secular price correction seems unlikely in the current scenario given the increase in input costs. We have also noted that real estate prices did not decline across cities during the first phase of the ongoing pandemic. While developers are unlikely to make significant price corrections, steps such as stamp duty reductions and circle rate adjustments could potentially drive some downward adjustment in prices.

Our Real Insight report shows that prices have increased by about 1-5 percent during the first quarter of the current calendar year as compared to the prior year.

How do you think rental prices and leasing terms will undergo revision for the commercial office spaces?

Rental prices and leasing terms are a function of demand and supply. While we see a hybrid work from home / office model emerge in the foreseeable future, we will also see a de-densification of office space that may require larger spaces to house employees coming in to work. When compared to 2019 which was a record year for commercial year, 2020 was relatively soft in terms of new supply and absorption. At the same time, India may emerge as a strong market for global companies once the ongoing pandemic subsides and consequently, demand for office space may not suffer in the longer term. Commercial real estate absorption was lower in the first quarter of this calendar year both on a quarter-over-quarter and year-over-year basis. We expect rentals to be range-bound in the short to medium term but we are likely to see landlords be more flexible through providing rent-free periods, lower rent escalations and fully furnished offices to induce tenants to take up space. Also, co-working will emerge as a preferred leasing option for small to medium sized companies given the flexibility in scaling up or down as required and shorter-term lease commitments.

Which segment do you think is likely to pick up faster than others in the residential housing for Tier II-III cities?

Affordable housing has been a growth driver for the real estate market across Tier 1, 2 and 3 cities. In fact, over the last couple of years, affordable housing has accounted for more than 50% of launches and sales in Tier 1 cities. There is no doubt that this is a segment with massive growth opportunity over the next decade. However, the affordable housing segment tends to be adversely impacted during conditions such as the pandemic but tends to recover quicker than other segments during the onset of economic recovery.

REITs market in India is poised to enter a period of prolonged growth. How prompt do you see traditional Indian investors adapting to investing his/her funds in it?

Currently, there are three listed REITs in India – Embassy Office Parks, Mindspace Business Space and Brookfield Real Estate Trust. Embassy Office Parks has so turned in a good performance for investors. There is a massive growth opportunity in REITs with more than $35 billion of real estate assets that is eligible to be listed as REITs. We are also likely to see strong brand names enter the market for REITs thereby adding to the credibility of the investment instrument. While REITs has been known to retail investors in the US for over 50 years, it is relatively unknown to Indian retail investors. In fact, individual investors hold less than 10% of Embassy’s public shareholding of almost 40%. Investment lot sizes need to be reduced to drive individual investment in REITs. Let us not forget that REIT is a $2-trillion asset class globally.

What role will the governing body for REIT -SEBI play in easing out the financial access for investors?

There is a lot of deliberation on that front. The government has already decided to permit foreign investors an entry into debt financing of REITs. This asset class may have changed the face of the Indian office market given that the country has listed three REITs in two years which reflects the eagerness of investors to embrace high quality assets that provide a better product to tenants and investors. As I had mentioned earlier, lower lot sizes should enable better retail participation, improved trading volumes and facilitate entry of REITs into benchmark indices. We believe that the Reit structure has permanently altered the face of the Indian office market.

The governing body for REIT –SEBI has to ensure that the global best practices are not only fostered but also strictly adhered to in the management of REITs. REITs is a modern day financial tool which is relatively unknown to the Indian investing audience. SEBI has to ensure that investors are well protected in the capital market and will continue to do so in the case of REITs as well.

How do you evaluate REIT vs. direct real estate purchase as modes of investment?

Direct investment in a rent-yielding commercial property is not only out of reach for a lot of investors, it is also fraught with lots of risks. REITs, in a limited manner, function as insurance where the risk of investment is spread over a lot of investors. In the case of direct real estate purchase, the risk is far more significant for the individual investor since asset quality and administration and returns may be risky in the case of direct purchases.

The idea of REITs is to bring investment in commercial real estate within the reach of an average share market investor who shares large risk with lakhs/crores of other investors of a particular REIT. The best part is that REITs has been given an institutional framework and the investment is systematic. The REIT listing laws in India are quite strict, even as compared to other countries, which makes management, reporting, transparency etc far better, something that is not possible in direct purchase. In fact, it is to do away with the many perils of direct purchase that REITs have been promulgated and that is why they are doing well in whichever country it has been allowed.

What more can the government do to support its objective of ‘Housing for All’?

Housing for All has been a landmark initiative. The government correctly identified the need for housing in the country along with other necessities like healthcare, education food etc. and embarked upon the journey for “Housing for All” in the country. The initiative has met with considerable success in rural and urban spheres. Now the need of the hour is to take care of some of the teething problems as has been seen in some parts of the country. Also, with the learning of ‘Housing For All’-1, we can roll out ‘Housing for All” – 2 which will cover more segments of our society and provide homes to larger a section of the population. The need is to match the interest rate subsidy for MIG I and MIG II categories to the interest rate subsidy given to EWS and LIG categories, i.e., 6.5% in ‘Housing for All” -2 . There is also a need to increase the size of MIG I homes to 200 sq mt and that of MIG II to 250 sq meters in view of the current situation.

What is the kind of price correction the luxury real estate market is expected to undergo in metro cities?

Luxury housing has seen a comeback of sorts in the last 10-12 months owing to different reasons. The luxury housing market today is doing well and there is unlikely to be any significant price correction in this segment. The luxury property developers are coming up with new offerings, together with an extra room that will cater to the WFH (Work From Home) requirements. The builders who have been quick to add this extra room in their luxury homes have been reaping the most benefits lately. However, the few luxury residential projects in a far flung pocket of a city which the builder started out of his over confidence will see some price correction. But all in all, we can say that the prices will remain firm and it is the best time to buy a luxury home.

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