The tax benefit on the principal and interest payment is a significant attraction of real estate investing, in addition to capital growth and rental yield.
Neither price appreciation, nor rental yield is impressive. The interest rate is continuously on the rise as is the equated monthly instalment. What lies in store for real estate investors?
The tax benefit on the principal and interest payment is a significant attraction of real estate investing, in addition to capital growth and rental yield.
The Union Budget and the Reserve Bank of India’s (RBI’s) monetary policy is vital for the real estate sector. One sets the tone for the economy and the other, the interest rate. But nether, it seems, is working in favour of the real estate sector.
In Union Budget 2023, there were no major announcements for the real estate sector to boost demand as expected by the industry. On the flip side, the government’s intention to move to the new tax regime is equally not complimentary for the sector either, as it will do away with the tax benefit that homebuyers enjoy on the principal and the interest components on home loan repayments.
The central bank also seems to be in no mood to take a pause on interest rate hike. As anticipated, the RBI hiked the repo rate by 25 basis points (bps) to 6.5 per cent. This will translate into higher equated monthly instalment (EMI) for investors (homebuyers).
The Appreciation
According to Anarock Research, the top-7 cities have experienced a growth of around 11 per cent over the previous five years. The current average price per square foot across the top-7 cities is around Rs. 6,150, which was round Rs. 5,551 in 2018. This translates into 2.07 per cent compounded annualised growth rate (CAGR) much below your savings bank account.
According to the same report, 2022 saw the maximum yearly rise (6 per cent) in average property prices (Rs. 5,826 per sq. ft. in 2021 to Rs. 6,150 per sq. ft. in 2022).
The previous four years, on the other hand, saw either no change or a maximum of 3-4 per cent increase year-on-year (y-o-y) in 2021 against 2020.
Before the Covid-19 pandemic, property prices across cities remained range-bound due to a prolonged demand slowdown. Even the price rise in property price is not only because of higher demand, but due to higher input cost.
“Post the pandemic, demand soared across cities as did developers’ input costs causing prices to rise, particularly in 2021 and 2022. Another factor driving prices up is the fact that most sales happening now are by branded developers who have not shied away from price hikes on the back of strong demand and rising construction costs” says Prashant Thakur, senior director and head research, Anarock.
According to same report, 2021 saw some improvement, with rental yields rising across cities and nearing 2019 levels. However, 2022 saw a decent rise in rental yields, which breached pre-Covid levels of 2019 across all the top-7 cities. This was largely due to a sudden spurt in rental demand following the reopening of schools and offices.
“The current rental demand will remain strong in all cities as urban work opportunities rise and more people migrate to cities,” says Thakur.
Despite decent rise in rental yield, it is still below the bank fixed deposits rates. Bangalore has the highest rental yield of 3.9 per cent among all major cities, followed by Mumbai at 3.8 per cent per annum.
What Should You Do?
According to industry reports, India’s top-7 prime residential markets had the highest sales in the first half of the fiscal year 2022-23 as compared to the last decade. Record-breaking sales demonstrate a positive change in buyer and investor sentiment in India’s residential real estate sector.
“While the Indian real estate sector has experienced several hiccups in recent years, it continues to meet investor expectations despite being time-tested and widely believed to be immune to market fluctuations” says Ashish Kukreja, founder and CEO, Homesfy.in.
While the future of the market is uncertain, understanding the long-term real estate trends in India and the factors that have shaped the market can help investors make more informed choices. Also, technological advancements and demographic shifts are likely to impact the Indian housing market in the future significantly.
“Despite its unique challenges, the Indian housing market offers investors a variety of investment opportunities and higher real estate returns than other global markets,” says Kukreja.
The jury is still out on whether you should invest in the real estate or not. If you are investing, make sure to invest in real estate that provides a good return. When investing in property, it’s crucial to pick the right one.