Sunrise sectors generally follow a pattern of rise and fall leading to consolidation and structural changes.
Time has come for the real estate sector in India to transform from a largely unorganised sector into an organised one, with a national regulator in place.
From its heyday, spurred by credit flow following the opening up of the sector to foreign direct investment and listing of real estate companies in the stock market, there has been a substantial erosion of money from the sector in the recent past. Still, there exists a yawning gap between people’s buying power and unrealistic expectation of sellers. In these circumstances, affordable housing options in a city such as Kochi will depend heavily on how soon the sector gets regularised.
Every sector has undergone similar transformation. “For instance, with the opening up of the equity market, a regulator called SEBI [Securities and Exchange Board of India] came in. Likewise, real estate is in the process of a structural change because this is an investment asset class. This is something that people need,” says Suraj Nair, chief executive officer of Honey Bricks Property Management Private Ltd., which seeks to build an institution base for property intermediary services for the buyer and the seller. Problems crept in when seller expectations rose sky-high for various reasons. “But Kochi was not an isolated case because there was a wave of credit available across all asset classes around the world,” Mr. Nair says. “Equities and real estate in all economies outperformed everything else. When it declined, it did so the world over. In cities such as Mumbai and Bangalore, there was substantial erosion in property prices to the level of 45-50 per cent. Gold was outperforming all asset classes everywhere, including Kochi, where the erosion was only 10 to 12 per cent so far.”
After research for five months prior to its launch in July, Honey Bricks realised that in major tier-1 and -2 cities, over 70 per cent of real estate buying was for personal use or dwelling. About 25 per cent came in as investment. Kochi was, perhaps, the only city where it was primarily an investment option. “But there is something called affordability index. For instance, when a company’s health is evaluated, its market capital, balance sheet, a lot of financial ratios and economic indicators are taken into account. Similarly, there are a lot of financial indicators and economic ratios that define the value of property. Take the rental yield, for instance. Suppose someone buys an apartment for Rs.50 lakh in Kochi. The maximum rental yield that he would get could be in the range of Rs.8,000 to Rs.12,000 depending on the type of furnishing that has been done. In stray cases, the rent could be about Rs.15,000 to Rs.20,000 depending on the grandeur of the interior. If instead Rs.50 lakh is put in the least preferred of investments called fixed deposit, you are bound to get Rs.23,000 to Rs.24,000 after tax. Is real estate an investment option at this point when the least preferred investment option could yield a better return?” Mr. Nair asks.
“The seller has to be brought down from his level of expectation to a reasonable level of expectation. As for the buyer, there is still demand for real estate property, but the cream is gone. That raises the question of affordable housing,” he says.
News Published Under: The Hindu