The Tipping Point

“Real Estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”

Franklin D. Roosevelt

Real estate as an investment opportunity today has lost its appeal, especially so amongst millennials. With a shift in preference towards paper investments like mutual funds, equity stocks and bonds, millennials believe real estate is too esoteric to say the least. A major reason for harboring of such sentiments comes from a lack of information provided by builders, shoddy construction and constant delays. Builders and developers are not transparent about the legality of their proceedings, the quality of construction used and more often than not fail to provide what was promised in terms of timely delivery and a superior product. Further, market rates in major metro cities like Mumbai and Delhi are exorbitantly high making real estate a non-viable investment option for most earning members between the ages of twenty to forty. A lack of disposable income, suitable guidance and accurate data add to an already long list of reasons for why for many adults today are choosing to shy away from investing in a fixed asset like a property.

To begin, when discussing real estate investments, it is important to be able to look at a property purely as an investment opportunity and not as an alternative residence. Most millennials currently live in homes that were purchased by their parents early on in their careers. Therefore, it seems almost natural for them to think that the first house they purchase should also be the one they live in. Real estate is a good, solid and bankable investment for any individual looking to begin his or her life. Our current market scenario is very favorable for such investments, especially those made in up-coming locations. Mortgage rates are currently around 7% with it dipping as low as 6% for certain affordable housing projects. With borrowing becoming cheaper, one can seriously consider real estate investments even on a modest budget. A number of reputed builders have taken up large residential projects on the outskirts of metro cities. These projects are self-sufficient, have state-of-the-art amenities, good quality construction and most importantly are affordably priced. To take the example of Mumbai, builders like Lodha Group, Hiranandani, Runwal and L&T Realty all have large residential projects in the towns like Dombivali, Panvel, Bhiwandi & Thane which are situated out on the outskirts of Mumbai and cater to those working in and around the city. They make a great option for those looking to invest in a high-quality product, with a somewhat low budget. The rental yield in India is currently averaged at around 2-4%, and the capital appreciation for residential properties is approximately 5-6% p.a. An investment in real estate is likely to give you a combined annual return on investment of approximately 7-10% against borrowings of 6-7%, thereby making your investment viable due to a positive interest arbitrage.

The scope of leverage is high in real estate investments when your capacity to repay is sound. Banks and other NBFCs are currently offering customers with a capacity to repay loans a wide variety of options in the form of subvention schemes and more. Residential housing today is positively arbitraged, with interest rates being lower than one’s average earning capacity. The prospect of earning higher yields than interest rates on mortgages is extremely bright and likely. Therefore, with the right strategy, the opportunity to earn with real estate investments are multifold. Our current market has a plethora of options to choose from depending upon one’s budget and ability to service loans. Bottom line, I feel that we have reached the tipping point wherein the interest arbitrage will ensure buying real estate as a safe and sound alternative investment.

“Views expressed are the personal views of the author. Any action taken based on the views will be the responsibility of the user alone.”

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