With gold touted as most popular asset class, correcting by 20% after a decade long Bull Run and crude oil and equities following suite, everybody is wondering whether the one asset class, unaffected so far, real estate will follow a similar path as well. Or will the supply demand mechanism of the Real Estate overpower negative sentiments and bypass the recent turmoil unscathed. Mayura Shanbaug Reports...
Unfortunately, the correlation between gold and real estate cannot be verified as there is no long term real estate index data in India that will help with any reliable conclusion. However, an analysis done by Karvy’s research team on 20 years data of the Hong Kong real estate index and gold price showed that the prices of both have an 81% correlation. Similar holds true for the Indian data in 2012-13.
“If Gold prices correct as an asset class, more money flows into buying the yellow metal and this will impact the realty sales,” says Parikshit Kandpal, Real Estate Analyst, Karvy Stock Broking
“Over the last two years, the average Gold import has been $51bn which equals to annual residential Real estate purchases of approximately $48bn. Now an 18% correction offers an opportunity for investors to switch from Real estate to Gold,” he says. “The most impacted markets could be ones which have high investor concentration like NCR (including Gurgaon) and Mumbai,” he adds.
According to Dr. VK Vijayakumar, Investment Strategist, Geojit BNP Paribas Financial Services, the real estate market also is likely to be affected by the adverse sentiments emanating from the crude and precious metals markets decline. “The sluggishness in the economic growth rate also will be adverse for the real estate sector,” he says.
“The present valuations are certainly on the higher side, particularly in some metro pockets. The dismal occupancy rates in apartments and the high inventory are indications of excesses in the segment,” he added.
According to Vikram Dhawan, Director, Equentis Capital, the real-estate sector has been correcting since 2012 and barring a few select Up-market areas, others have seen significant corrections in prices across the country. “I feel that Real Estate as an investment may not give good returns in the medium term i.e. 12-18 months. However, those looking to buy a house for living may start bargain hunting,” he says
Echoing similar sentiments is Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India. According to him, price movements in the real estate sector are the result of supply and demand. “The demand drivers for real estate are not the same as for precious metals. Though, in investment terms, they technically fall under the category of asset classes, the demand for residential property stems from the desire for home ownership that is hard-wired into the Indian psyche. It is demand from end-users that dictates investors’ appetite for residential property,” he says.
“Precious metals are an investment class that people will consider after this basic desire is satisfied. Moreover, the prices of precious metals are not location-specific – they rise and fall uniformly. This is hardly the case with real estate, which performs differently at different times in different cities and micro-locations,” says Puri.
So one should invest or stay away from investing in this environment? There seems to be no definite answer to this. “There is no one-size-fits-all formula for the viability of real estate as an asset class for investment,” says Puri.
“Three parameters for successful investment in any asset class are when to invest, how much to invest and when to exit. In real estate, three additional variables are where to invest, into what type of real estate and in which location,” he says. Investors who lack the requisite knowledge and research to make winning real estate investment decisions will not meet with much success in this vertical,” he adds.
“There are better options especially, Tax Free Bonds and certain Blue Chips Stocks that are trading at very attractive valuations. In other words, the yield on lease rentals is around 2-3% of the market value while the return on secured debt instrument is above 8% in tax free bonds,” says Dhawan.
However, Dr. Vijayakumar cautions that even the price to rent ratio is excessive and unsustainable. The real estate market will not correct the way crude or precious metals market correct. “It will be a slow grind down. Therefore, it doesn’t make sense to aggressively invest in real estate now as an alternate asset class to gold,” he feels.
So where do the prices go from here? “We don’t see any significant appreciation especially until middle of 2014,” says Dhawan. “In the longer term we feel that those areas where infrastructure is expected to improve may sustain 15% appreciation in the long-term and Gross Rental Yields of around 3%,” he adds. Dr. VK Vijayakumar feels that in the short run, the real estate market will get a shot in the arm through declining interest rates. “India’s declining inflation and crash in the price of crude and gold has created a favourable setting for the RBI to cut interest rates much more steeply than the consensus estimates,” he says.
So “In the short term, real estate will remain stable and only see minor upward or downward fluctuations. In the long term, it will rise again,” says Puri.
“The fundamentals of the India are extremely strong. Even in this turbulent economic environment, India remains the cynosure of interest by global MNCs and investors who see the limitless potential of a young, growing economy, a wealth of highly trained workforces across the manufacturing, IT/ITeS and services industries and the assurance that demand for real estate can only rise in such an environment,” he adds.