Joe Verghese: Affordable Real Estate is the Key

Image: Pawan Kumar / Reuters

The opportunity is in the small cities

Like with all investing, one needs to first define one’s time horizon. I’d define short term as say three years and long term as more seven years.

Now, let’s say you have a long-term time horizon and are willing to take a call on where the business hub of Mumbai is going to be. Buying commercial property in Bandra Kurla Complex would then be a reasonable call. Capital values are not at their best but rentals have held up. The rental yield on these projects is often more than 10 percent. With residential real estate, the bet is slightly different. Investors usually want to turn their money around quickly, in three or four years. Here it is best to go in for pre-sales from developers. The growth in the market is huge and there is demand, but getting in at the right price is key. Here it is important not to look at just the project’s location but also the developer’s track record—talk to a few investors who have seen the developer in past projects.

Both options discussed above have to be looked at against the backdrop of a slowing market across the country. Affordability is the key and leaving aside markets like Mumbai, anything in the Rs 3,000 to Rs 6,000 per sq ft range sells. The last four years have been unique in that there have been high interest rates coupled with high inflation and slowing salary growth. One would expect sales to slow, but our research shows that people are still stretching to buy that first house.  

If I were to stick my neck out I’d say that 2014 could also be the year of falling rents. Due to high capital values, rental yields are out of sync. My sense is that if a landlord is not getting the rent he wants, he may do a deal at a lower level, but if he has to sell at a lower price he is more likely to hold on. Most landlords are still not prepared to accept lower capital values because they are not overleveraged.

Smaller cities are another market that can outperform in the years to come. The biggest market for homes here is the “I grew up in this city and so I am buying a flat and keeping it”. Developers sell to NRIs. The income levels in these cities are going up and the costs are not so high. A lot of developers in these small cities say they don’t have a problem. And they don’t tend to be aggressive.

Lastly, realty funds are also safe bets. Most are doing very structured deals and very few are investing in commercial property. They are all putting money in residential tier 1 developers where they are assured of some kind of returns, or in leased assets. I believe the funds and the developers have matured—they’ve realised they have to take care of investors. I think it would not be as risky as in the first round between 2005 and 2008 when a lot of investors lost money.

(As told to Samar Srivastava)