Is Real Estate a Good Investment and Business in India?

7 Mins

Real estate has long been considered one of the most popular investment options worldwide, and India is no exception. However, whether real estate is a good investment in India depends on various factors such as location, market conditions, government policies, and economic indicators. Let’s look at the pros and cons of investing in real estate in India

Advantages of Investing in Real Estate in India

1. Steady Growth

According to the National Housing Bank’s (NHB) RESIDEX, which tracks housing prices in major cities across India, the residential real estate market has witnessed consistent growth over the years. As per the NHB RESIDEX data, the composite index for residential properties in India has shown an upward trend, indicating positive returns on investment.

2. Increasing Urbanisation

India is experiencing rapid urbanisation, with a significant portion of the population migrating to cities in search of better job opportunities and improved living standards. This urbanisation trend has fueled the demand for housing and commercial spaces, making real estate a potentially lucrative investment option.

3. Government Initiatives

The Government of India has implemented various initiatives to boost the real estate sector and attract investment. The introduction of the Real Estate Regulatory Authority (RERA) and Goods and Services Tax (GST) has increased transparency and streamlined processes in the sector, making it more attractive to investors.

4. Infrastructure Development

Investments in infrastructure development, such as the construction of new highways, metro systems, and airports, have a direct impact on the real estate market. These developments not only improve connectivity but also drive up property prices in the surrounding areas, presenting investment opportunities for real estate investors.

5. Foreign Direct Investment (FDI)

Foreign investors have shown considerable interest in India’s real estate market. Foreign investments in the commercial real estate sector were at USD 10.3 billion from 2017-2021. This influx of foreign investment signifies the confidence of international investors in India’s real estate sector.

6. Rental Yield Potential

Rental income can be an essential aspect of real estate investment. According to a report by Knight Frank India, major cities in India have witnessed stable rental yields over the years, ranging from 2% to 5% annually. However, it is important to note that rental yields can vary significantly depending on the location, property type, and market conditions.

7. Affordable Housing Segment

The affordable housing segment in India has gained traction in recent years, driven by government incentives and subsidies. The Pradhan Mantri Awas Yojana (PMAY) aims to provide affordable housing to all by 2022. This sector presents opportunities for investors looking for long-term returns, given the rising demand for affordable homes.

8. Real Estate Investment Trusts (REITs)

The introduction of Real Estate Investment Trusts (REITs) in India has provided retail investors with an avenue to invest in income-generating properties without directly owning them. REITs offer the potential for regular income and capital appreciation, making them an attractive option for investors seeking diversification in their investment portfolios.

Disadvantages of Investing in Real Estate

While real estate investment in India offers various advantages, it is essential to consider the potential disadvantages as well. Here are some key drawbacks associated with investing in real estate in India:

1. High Initial Investment

Real estate investment often requires a significant amount of capital, especially in prime locations or metropolitan areas. The high cost of entry may limit accessibility to the market for some investors.

2. Illiquid Asset

Real estate is generally considered an illiquid asset, meaning it may take a considerable amount of time and effort to sell a property and convert it into cash. This lack of liquidity can be a disadvantage for investors who require quick access to their funds.

3. Market Volatility

The real estate market in India can be subject to significant fluctuations and volatility. Economic factors, government policies, and market conditions can impact property prices and rental yields. Sudden market downturns can lead to a decline in property values, affecting potential returns on investment.

4. Regulatory and Legal Challenges

The real estate sector in India has historically faced challenges related to regulatory compliance and legal complexities. Issues such as delays in obtaining necessary permits, disputes over property ownership, and lengthy legal procedures can add significant risks and uncertainties to real estate investments.

5. Maintenance and Operational Costs

Owning and maintaining a property entails additional costs such as property taxes, maintenance expenses, utility bills, and repairs. These ongoing expenses can impact the profitability of the investment and require careful financial planning.

6. Project Delays and Quality Concerns

Real estate projects in India often face delays in completion, which can impact the expected returns for investors. Additionally, concerns related to the quality of construction and adherence to building standards have been reported in some cases, highlighting the need for thorough due diligence before investing.

For those investing in rental properties, dealing with tenants can present challenges. Issues such as non-payment of rent, property damage, and legal disputes can arise, requiring time and effort to resolve. Vacancy periods can also impact rental income, affecting the overall profitability of the investment.

8. Economic and Political Risks

The Indian real estate market is influenced by broader economic and political factors, both domestically and globally. Economic downturns, policy changes, and geopolitical events can impact investor sentiment and market dynamics, potentially affecting property prices and rental demand.

9. Lack of Transparency

While efforts have been made to increase transparency in the real estate sector through initiatives like RERA, challenges related to opacity and information asymmetry still exist. The limited availability of reliable data and the presence of unorganised segments of the market can make it challenging for investors to make well-informed decisions.

Market Size and Growth of Real Estate Sector in India

According to India Brand Equity Foundation (IBEF), the real estate sector is one of the most globally recognised sectors in India. It contributes about 6-8% to the Indian gross domestic product (GDP) and is expected to contribute about 13% by 2025. By 2030, the real estate sector in India is expected to reach USD 1 trillion in market size from USD 200 billion in 2021.

The real estate sector comprises four sub-sectors:

Housing sub-sector accounts for nearly 80% of the overall real estate development in the country.
Retail sub-sector is driven by the growth in consumer spending and urbanisation.
Hospitality sub-sector is supported by the increase in tourism and business travel. Commercial sub-sector is fueled by the demand for office space from various sectors such as IT/ITeS, BFSI, manufacturing, etc.

The real estate sector in India has witnessed several developments and reforms in recent years, such as the introduction of Real Estate (Regulation and Development) Act (RERA), Goods and Services Tax (GST), Insolvency and Bankruptcy Code (IBC), Affordable Housing Scheme (PMAY), Real Estate Investment Trusts (REITs), Smart Cities Mission (SCM), etc. These initiatives have improved the transparency, accountability, affordability and efficiency of the sector.

The real estate sector has also attracted significant foreign investments from various countries such as Singapore, UAE, USA, UK, Canada, etc. Some of the major foreign investors in the Indian real estate sector are Blackstone Group, Brookfield Asset Management, GIC Pte Ltd., Ascendas-Singbridge Group, Mapletree Investments Pte Ltd., etc.

The real estate sector in India has also witnessed several trends and innovations, such as green buildings, co-working spaces, co-living spaces, data centres, warehousing, logistics parks, integrated townships, smart homes, prop tech, etc. These trends and innovations have enhanced the quality, sustainability, functionality and attractiveness of real estate properties in India.

Conclusion

It is important for potential investors to carefully evaluate these advantages and disadvantages and conduct thorough research and due diligence before committing to real estate investments in India. Consulting with professionals and seeking expert advice can help mitigate risks and maximise the potential returns on investment.