Real estate is one of the major sectors that fuel the economy of India. The real estate sector is deeply intertwined with at least 220 allied different sectors. Today, it accounts for nearly 6-7 per cent of the economy and is expected to have nearly 13 pc share in the economy by 2025. No doubt, the sector has been one of the biggest wealth creators for buyers in the past few decades.
Indian real estate sector is also expected to cross the enormous market size of US$ 1 trillion by 2030 from just US$ 120 billion in 2017. Commercial real estate especially is growing unabated, providing the much-needed infrastructure for India’s growing needs.
Real estate historically has always been one of Indians’ most preferred investment avenues. People in general invest in real estate for capital appreciation as well as rental income.
However, the residential sector has been going through a hard phase over the past few years. There has hardly been any price appreciation across projects, both big and small, in major Indian cities. In contrast, commercial real estate has been doing really well over the past few years and most experts opine that despite the pandemic setback, this sector is likely to recover earlier than residential sector and may again prove to be a sound investment option in the long term.
The Pandemic Effect
After mild and temporary shocks due to long-term structural reforms such as GST and RERA, the new-found capital liquidity in the banking system and a restoration of buyer confidence were slowly but gradually gaining pace in the real estate sector before the pandemic hit us hard.
Though the devastation caused by the pandemic is sad to say the least, it is widely believed that the pandemic-influenced collapse in the commercial real estate market is at best a short-term blip. With the rollout of the vaccine across India and resumption of normalcy in the foreseeable near future, the real estate market will certainly bounce back with renewed energy.
We have already experienced short-term effects of the pandemic and can also safely predict the long-term effects on commercial real estate market. Most of the weakness in the demand is likely to reverse as the pandemic eventually retracts. There may also be long-term changes to how commercial real estate is used, for example, cubicle layouts and open areas may now be preferred by more office buyers.
Right Time To Make Investment
Atmanirbhar Bharat and the increase in FDI may usher a strong recovery of commercial real estate as we go forward in 2021. The decline of retail vacancies after an all-time high in the past few months and promising results coming from mass vaccinations will surely help elevate the interest of buyers in retail segment.
Despite the short-term troubles, India’s commercial real estate sector continues to attract interest from buyers looking for safe and assured long-term returns. With improving buyer sentiments and current low rates, we see a brighter future at the horizon.
Following SEBI’s amendment of the rules of REITs, low interest rates and high capital liquidity, there should be a heavy inflow of investment in commercial real estate that offers better returns as compared to other investment avenues.
Furthermore, with the extensive acceptance of Work-From-Home across the IT sector, ITeS buildings had to face medium vacancies through the Q1 of 2021 but if the threat of COVID subsides soon, we hope to see better occupancies in Q3 and Q4.
As the results coming out of mass vaccinations are promising, we expect our economy to be on track in one to two quarters. The improvement in the economic scenario, enhanced by the helpful reform initiatives will in turn fuel the commercial real estate sector’s growth.
Some experts believe that the opportunity to invest in commercial real estate was never better than now. With stable rates, lucrative offers and the sector witnessing a ‘buyer market’ rather than ‘seller market’, investment made in 2021 may give higher than average returns in the long term.
The rental yield from commercial real estate has traditionally been better than residential real estate. According to Propstack, a commercial real estate research firm, in the residential sector the rental yield is 2-3 pc appx. after paying maintenance and property tax, whereas in commercial real estate investors get a handsome net yield of 7-8 pc, which can be even higher given the goodwill of the project and the developer.
Not only that, given the extraordinary ups and downs that we saw in 2020, it’s only logical that most investors are increasingly looking beyond the stock market. And commercial real estate investment with its assured returns and high capital appreciation presents itself as a natural alternative.
Ashish Bhutani, Chairman, Bhutani Infra-Group, has this to say, “Investment in commercial real estate has always given great returns to buyers and investors. The pandemic, though very unfortunate, has in hindsight given an unnatural golden opportunity to buyers to invest in this sector as the prices have been low for quite a long time now and they are expected to skyrocket once the pandemic recedes.”