The landscape of real estate investing has changed dramatically over the last few years.

Ashish Khandelia,

Founder, Certus Capital and Earnnest.me

How do you assess India's real estate market last year?

Indian real estate market has gone through a tumultuous time over the past decade. This got further aggravated due to the IL&FS debacle and finally bottomed out with COVID-19, which was the low point for the sector. However, these events and regulatory changes (such as RERA, GST and IBC) also led to start of consolidation in the sector and weaning out of weaker players.

CY22 was a record year in terms of residential sales volume, and this positive sentiment was visible in both consumers and investors alike. Sales volume in tier 1 cities registered a jump of 68% over CY21, and 50% when compared with CY19 (pre-pandemic levels). Several factors that supported this growth include low interest rates in first half of the year, rising consumer demand driven by pandemic induced interest in home ownership, decreasing unsold inventory and upward trend in residential prices.

The above-mentioned trend has remained robust despite several headwinds over the last few months including ~200bps increase in home loan rates, rising construction material prices and input costs, supply chain disruptions and geo-political unrest. Other segments too continue to attract significant investments from international businesses, as evidenced by Rs 1,800+ crore investment by Amazon for its data centre in Thane, Apple opening its first Apple store in India in Jio BKC, Mumbai and Morgan Stanley leasing 1 mn+ sf some time ago in western suburbs of Mumbai, to name a few.

How is the market progressing currently? What are the key demand trends?

Residential real estate market continues to remain vibrant in 2023 with more traction in mid-market and premium segments. Transaction sizes are inching higher for such homes with consumer preference shifting towards bigger houses and community living. A price appreciation of anywhere between 5%-7% is expected this year. Branded players continue to garner larger market share and consumers too are more comfortable with developers with demonstrated track-record of delivering on time.

To add to the above, we're witnessing the best affordability in nearly two decades. The last time affordability was at these levels, the next five years saw a robust price growth. Further, rising income levels and marginal price increase (in mid-single digits) have together set the tone for a multi-year upcycle for the real estate market.

Overall, the real estate market is predicted to touch $1 trillion by 2030 and will contribute over 10% to India's GDP by 2025, which currently stands at 7% (source: IBEF).

However, office sector is seeing slower absorption at the moment, driven by recessionary concerns in the western world, as most of the tenants for institutional grade office assets are multinational companies. Further, many offices are yet to get to high levels of physical occupancy, thereby putting pressure on renewals/new leasing. Across markets, vacancies have gone up (e.g. Bangalore office vacancy is up from 4.7% in 2019 to ~12% by end of 2022), despite developers slowing completions/deferring new starts.

What kind of investments are happening in residential, commercial, and institutional real estate segments?

The landscape of real estate investing has changed dramatically over the last few years and one doesn't just have to buy physical real estate to be invested in this space. As an asset class, it is best suited to provide inflation-hedge with attractive returns without the equity risk. In our opinion, the financialisation of real estate is the most exciting trend to watch out for in real estate investing. This theme had re-defined real estate investing in the west. This trend started with first REIT listing in 2019 followed by multiple fractional ownership platforms which made CRE accessible to a wider investor community. Now, there are also platforms that are democratising access to credit opportunities which, to date, were only available to institutions. And robust fundamental demand coupled with low capital availability is creating a very attractive vintage for real estate credit.

Institutional investors are betting big on both real estate equity and credit investments. A few such investors include Bain Capital, Varde, Oaktree, HDFC Capital, PAG and Kotak. As per our estimates, more than Rs 20,000 crore have been invested since 2019 in credit opportunities alone.

According to CBRE, the broader real estate sector received nearly $7.8 billion in 2022, a 32 percent year-on-year (YoY) growth and with a close to 60% share of foreign investors. These capital flows are likely to remain steady or even grow as investors look to diversify their investments amid recessionary fears in US and Europe.

How far the rising interest rates affecting the buying sentiments? What could be the trend going forward?

Interest rates have risen by ~2% over the last one year from the bottom of ~6.5%. Despite this increase, at ~8.5% they are still in line with long-term trend and being well absorbed by the market. We haven't seen any material impact of rising rates in the mid-income segment and above. Affordability levels (ratio of housing prices to annual income) are still at a two decade high and therefore the demand remains robust.

However, affordable housing segment has been hit by this increase in home loan rates. Increase in EMIs have reduced housing affordability for a segment that is least capable of absorbing the increased burden. We have seen a shift in demand towards one bed room units from larger sizes, as these larger units get out of reach.

We do feel that we are approaching the end of the rate hike cycle and so long the home loan rates remain in the 8.5% zone, the boarder market will continue to remain robust.

What are your current invest portfolios in India? What are your future plans?

We believe real estate is an important asset class and should be allocated in all investment portfolios. Especially, the vintage for residential credit is very strong, as is also evidenced by strong institutional interest from both global and domestic investors.

Our highest conviction theme is to participate in the residential sectors' robust recovery through secured credit investment, similar to the activity witnessed by institutional investors. These investments offer significantly higher returns compared to traditional debt investments, are secured by physical assets such as real estate and are serviced through visible cash flows from the underlying projects. Further, it doesn't require large allocations and one can participate with a much smaller amount such as Rs 10 lakh only.

Through our alternative fixed income investment platform, Earnnest.me, we have invested Rs 200 crores in senior secured debt opportunities, since going live last February. These investments were made with developers having 20+ years of experience and delivery track record, across affordable, mid-income and premium housing projects located in Chennai, Pune and Mumbai, respectively. These secured, fixed income investment opportunities offer anywhere between 14%-16% returns with a duration of ~3-3.5 years. We target to close FY24 with gross investments of ~Rs 750 crores through Earnnest.me.

Hits: 0