Investment in Real estate: Most Attractive opportunity

Any seasoned market player would tell you that the best time to invest in the real estate sector is now. The Indian economy has shining prospects like never before and real estate prices have cooled down considerably from their peak. Any investment made in the real state sector now is sure to translate into windfall gains from real estate prices that are expected to look up in the next few years.

A report by KPMG suggests that the Indian real estate is poised for a phenomenal growth in the next few years. The reasons are not too far to seek.  At least 10 million people are moving into cities annually and there is a shortage of approximately 19 million homes presently.  If we consider the demand from redevelopment and shrinking size of the average household, the demand supply gap could be much higher. Fundamental factors are also very encouraging. The government of India has  proclaimed its ambitious “housing for all by 2020” and is supporting it with prominent reforms like FDI in real estate, new land acquisition law, appointment of a real estate regulator, and setting up of Real estate Investment Trusts.

Currently, India has the highest GDP growth rate in the world and India’s infrastructure investment is higher than ever before. Foreign investment comes mostly in the commercial space and large infrastructure projects like metro railways, international airports and malls. India’s economy is expected to be the fastest growing economy for the next few decades. The growth could be driven by infrastructure investment and rising manufacturing and service sector. Within the service sector, the growing IT and banking sectors are expected to add to the demand for commercial space.

Although the picture for the real estate sector is very bright, there are a few challenges and hurdles. The lack of suitable development land within basic infrastructure has led to a surge in land prices in urban areas.  Strict and prolonged regulatory process leads to delay in real estate development. Lack of clear titles and title insurance in India often makes it difficult for developers to find suitable land parcels. Despite being the second largest employer in the country, the construction sector as a whole faces shortage of manual labor.  This can be remedied by adopting technologically faster and alternative methods of construction on a large scale.

Perhaps the most difficult challenge lies in arranging for initial funding for any project. The Reserve Bank of India has set threshold for the total maximum exposure to real estate for banks at 15% which is holding back the sector.  With the government allowing 100% FDI in real estate, the funding crunch is expected to ease. The launching of the Real Estate Investments Trusts (REITs) is also on the anvil. This market could open up new funding avenues.

Investors would do well to start considering investment in the real estate sector especially in commercial space and land banks. Property prices have already eased from their highs and are expected to stabilize at current levels. Like with any other industry that has its ups and downs, real estate is going through its cyclical bear phase and is expected to turn by the next two quarters. An investment in the next few months will provide handsome returns in the next few years.

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