4 real estate trends to watch in 2022

Indian household wealth (around 77 percent) is mostly held in the form of real estate, according to data from the Reserve Bank of India. However, this asset has not appreciated for nearly a decade and there have been multiple attempts to call the bottom and predict a recovery. These have not gone well in the past for a variety of reasons, including the long-lasting pandemic. Will this year be different? And what are some macroeconomic market trends buyers can keep in mind when looking for new opportunities that can pay off when the going gets tough?

Rental stimulus

Renting, especially in the residential segment, has not been an exciting topic in the past. This is because the real estate market was a game of capital appreciation and the rental returns were paltry. With the rise in house prices, rental yields have not been able to catch up and have remained at 2-3% in most markets, even in the absence of price appreciation. Landlords have also found renting a home to be a problem as there aren’t many property management companies to meet the needs of tenants. The legal rights of landlords are also not very strong and violation of terms by tenants is not easy to deal with. Thus, buying to rent was not a popular option. For a tenant, calculations of whether it’s better to rent or own a house have consistently shown that renting is a better option, especially in recent years when prices have stagnated at best. But a few trends in the market – somewhat derailed by the pandemic that has driven rents even lower – indicate a likely shift in rent dynamics relative to its own dynamics.

Rents will likely increase for several reasons. First, homeowners will need a higher return as price appreciation has moderated. Second, legal frameworks such as the Model Tenancy Act will make it easier for larger players to enter the fragmented residential rental market. Third, trends such as cohabitation will help unlock more property value and increase rents, which will also help boost demand for properties for builders. Fourth, rental demand is likely to increase, as many potential buyers may delay their buying decision due to caution about their financial stability coupled with the lack of urgency to buy in a sluggish real estate market.

Financialization

A property – similar to physical gold – was seen both as something that had an end use, but was also a store of wealth. But with the financialization of assets, this is changing and pure investors are moving away from properties suitable for end users towards more efficient options. For example, rather than buying apartments under construction at low prices – which in turn pays the cost of construction from the builder – they can opt for real estate private equity funds which are alternative investment funds (AIFs).

Likewise, owning a property as a long-term investment to deal with inflation can be best done through real estate investment trusts (REITs). There are also fractional ownership options that only require smaller investments while building a more diverse portfolio of different types of properties and locations.

Thus, the market may see less speculation in physical assets – due to the high cost and availability of other options – and more motivated demand from end users. This should support steady growth over the long term, once current imbalances reach their lowest level in the near term.

Specific products

Rather than building generic homes, builders look to specific themes and demographics. For example, senior residences have been a growing trend in recent years and have seen good demand and rising prices, even as the market as a whole faced headwinds. Likewise, student living spaces are another topic of interest.

There are also mixed-use developments – where residential, commercial and office spaces – are in the same complex. These autonomous communities are also arousing interest. These specialty projects usually help a developer stand out and create a Unique Selling Proposition (USP) and charge a premium. As consumers evolve, there may be a demand for more nuanced built spaces and these new themes may provide opportunities for good returns.

NRI factor

Even with a sober outlook, Non-Resident Indians invested $ 13.3 billion in the Indian real estate market in FY21, compared to $ 12.5 billion in FY20, according to 360 Realtors. But this may be a trend that could reverse, at least in the physical asset segment, due to a few factors. First, various travel restrictions due to the pandemic have made it difficult for NRIs to manage or sell their property, forcing them to rethink physical property issues. Second, real estate returns have not been exceptional and many may be hesitant to bottom out at this time, especially when there are other investment options such as equity. Third, even if real estate returns are good in INR terms, they may not see the full advantage in foreign currencies – with the outlook for global interest rates, the gains are likely to be eroded by the currency depreciation. There could be changes in the future, with implications for certain types of properties and geographies that get a higher share of NRI investments.

The author is an independent financial consultant

Floyd N. Morlan