Should You Invest in Real Estate During a Pandemic?
The Covid-19 pandemic and its consequent lockdowns have led to a drop of 54% in real estate sales across the top 8 cities in India – NCR, Mumbai, Pune, Chennai, Hyderabad, Bengaluru, Kolkata, and Ahmedabad. Additionally, commercial properties have also seen a decline of 37%, meaning that fewer people are investing in both residential and commercial real estate avenues.
However, this does not mean that real estate is no longer a stable and viable option for long-term investors! On the contrary, the dip in prices, as well as loans, makes this the perfect time for you to consider investing.
A. Top Reasons Why You Should Invest in Real Estate During the Pandemic!
1. It’s a buyer’s market now!
Often, supply and demand play a key role in determining the price of an asset. Currently, the real estate industry is facing one of its largest inventory crises in decades, with most cities having a high volume of unsold homes that are ready to move into.
This has, naturally, put a lot of pressure on builders, who are now trying to decrease their rates to boost sales. In fact, with the supply greatly exceeding the demand, the average property prices in the top 8 cities in India have not increased over the last year (barring in a few cities like Ahmedabad and Hyderabad).
Here’s a snapshot of the property prices across 8 different cities:
Average price as on September 2020 (in INR per sq ft)
Percentage change over September 2019
So, what does this mean?
It means that buying a home is a more achievable goal than it once was. With the prices being on the lower side, and new government regulations set in place to help buyers such as yourself, this is the right time to invest in real estate.
2. Record-low home loans are now available!
After the lockdowns in India, the economy virtually grinded to a halt. As real estate is considered the second largest employment sector in India, after agriculture, it’s not a surprise to see both the Government and RBI set new regulations to boost property sales. The RBI recently announced that repo rates would remain at 4%, which means that the money lent to commercial banks would have a lower interest.
As a result, one of the biggest factors working in your favour is that home loans are now available at a record-low 7% interest rate. Interestingly, there are even certain banks trying to offer home loans at an interest rate of 6.7%, which means that paying back these loans should be more affordable.
3. More support from the Government and RBI
Sensing the need to boost sales in the real estate industry, the RBI recently changed the risk-weightage norms followed by banks, to ensure that more people can secure home loans and buy property. Originally, the loan-to-value ratio (LTV) and loan amount helped banks determine the risk weightage. Now, the RBI has instructed banks to only use the LTV to identify the same.
Up to 80%
This move is meant to free up funds that can be lent to the real estate sector, as banks now have to set aside a lower amount of funds to handle associated risks.
For instance, let’s say a bank is extending a loan of INR 1 Crore. The LTV associated with the same is 80%, with a risk-weightage of 35%.
Loan amount x capital adequacy ratio x risk weight = the funds that the bank needs to set aside.
= 1,00,00,000 x 9% x 35%
= INR 3.5 Lakhs.
With banks being able to provide more funds to the real estate sector, investors can expect the housing sector to regain its former glory, with investments paying off in the future. Of course, while existing investors can breathe easy on reading this, it’s also important to understand what happens to prospective investors with the new regulations.
What is the impact of this on buyers?
The RBI has also changed the LTV that banks can offer credit seekers. The LTV is essentially the percentage of the property cost that a bank can fund during a home loan. It is determined via this formula:
LTV ratio = Borrowed amount/property value x 100
As per the new guidelines, a bank can now offer prospective buyers 90% of the total money as a loan if the home is priced at less than INR 30 Lakhs. If the home is worth between INR 30-75 Lakhs, then they will offer 80% of the total as a loan. The results of this are already showing in the form of affordable housing sales spiking. In fact, 2BHK configurations have emerged as the most popular ones in 2020 Q3.
As a prospective investor, you can enjoy two major advantages – you can buy property at cheaper prices, and you can expect the real estate sector to recover quickly thanks to the new guidelines.
4. Better impact of side-enablers leading to increased demand!
Apart from the new RBI guidelines regarding LTVs, other factors such as lower property valuations and lower interest rates make this a good time to invest in real estate.
It’s also important to note that the real estate market is now picking up, with housing enquiries already reaching 50% of what they were before the pandemic. The demand for ready-to-move-in homes is also skyrocketing. This suggests that property prices may surge in the coming months, and prospective investors shouldn’t drag their feet over buying property, as it may become an unaffordable option.
This increase in demand is quite natural – with the Covid-19 pandemic, many potential investors such as yourself realised the value of owning property. Now, with the prices and home loan interest rates low, savvy investors are narrowing down the property to invest in. Do note that the festive season has also led to an increase in deals and discounts, further boosting sales.
5. Wide variety of property available!
During the early stages of the pandemic, the top cities in India saw inventory overhang increase from an average of 24 months to an average of 37 months, increasing the burden of unsold stock. As of June 2020, the overhang (time developers are allowed to take to sell property) stands at:
Inventory overhang (in months)
This means that you are likely to find a wide variety of property types in your chosen city, well within your budget. From spacious residential apartments to commercial property in malls or marketplaces, you should be able to take your pick of the best.
B. Points to keep in mind
When investing in the real estate sector, do keep in mind the following:
1. What kind of property should you invest in?
This largely depends on your investment goals. If you are looking for an investment that offers monthly ROI in the form of rent, both commercial and residential properties can work in your favour, depending on the location of the same. Typically, commercial properties in bustling malls are good options for those who want regular and high supplements to their income.
2. Where should you buy a property?
The answer to this lies in your investment strategy. If you are interested in value investing, then choosing an upcoming area that will offer high ROI in a decade can be a good option. On the other hand, if you are looking for a short-term investment that can be sold quickly for a profit, then you should look at established commercial areas that are bound to see stable annual growth in property prices. Cities like Ahmedabad and Hyderabad have seen an annual growth of 6% due to the high demand, even in spite of the pandemic.
Read more about our take on the real estate sector, and the upcoming locations to invest in here.
3. Do not be over-ambitious. Instead, go slow!
If you have limited funds, you can still invest in property and grow your wealth. The idea is to invest in affordable property options and then use them to generate rent that can be further invested in a long-term or short-term investment avenue. Over the years, as the value of the property increases, you can always sell it for a higher amount, and then invest the amount in a different property.
4. Compare prices online!
One of the biggest real estate trends to emerge out of the pandemic is the widespread use of online portals to both explore and buy property. Fortunately, many of these portals allow you to compare prices online to see which realtor offers you the best deal. Additionally, you can find a higher variety of investment options that fall under your budget by using such portals.
Once you are satisfied with your search results, you should go ahead and make the investment.
5. Always think long-term!
Often, people miss out on great opportunities simply because those opportunities do not look as tempting as others. If you take NCR as an example, areas such as the Dwarka-Gurgaon expressway (which have a few residential properties in the making, but are largely barren), offer good investment options that will deliver a high ROI in the years to come. Do not be fooled by the barrenness of the area!
With RBI regulations working in your favour, and property prices at a low, this is certainly the right time to diversify your portfolio and invest in real estate. Find out more about how real estate compares with other investment tools like SIPs by reading this!