Better times ahead for real estate investors?

Indian investors have a bittersweet history with real estate. While Indians have always had a soft spot for real estate as an asset class, the segment has been rather infamous for its scams and crooked players.

So, to say it needed some regulatory changes would be downplaying it. And the changes did come. Demonetisation, changes in tax laws, the Real Estate Regulation Act (RERA), etc., all gave the sector the much-needed shake-up.

And considering that the pandemic followed this rewriting of the industry playbook, most expected a slowdown.

So no one was surprised when the BSE Realty index gave humbling returns of 7.8 per cent per annum in the last five years and 6.7 per cent per annum in the last 10 years. In contrast, the BSE Sensex has returned 12.1 and 12.5 per cent per annum, respectively, over the last five and 10 years.

Building towards a better future
Despite the rather gloomy history, the recent numbers hint towards a brighter future for the real estate sector.

FY22's massive surge in bookings can be taken as a sign of better times ahead. For the uninitiated, bookings (in the real estate world) represent the value of land or property sold by the industry to folks like us.

Here are the bookings numbers of the top five largest (according to m-cap) listed real estate developers in the nine months of FY23 and FY22.

As you can see, almost all of them witnessed exceptional bookings growth. Godrej Properties and Macrotech reported record bookings within the first nine months of FY23.

Also, while Oberoi Realty's 9M FY23 numbers might not seem that impressive, it was mainly because of a high base due to a stellar performance in Q3 FY22.

What turned the tide for the sector

• Rising income and lower rates: The rise in average household income, coupled with lower interest rates and easier access to house loans, has made purchasing a house a far easier affair for Indians.
• Tax benefits: Subsidies and tax benefits, such as tax exemption of up to Rs 2 lakh on home loans, have added to the popularity of real estate as an investment vehicle.
• Not an industry of crooks anymore: GST implementation, RERA, and an overall shift towards a more organised economy following the pandemic favoured the organised player and kicked out many crooks. According to a report by Anarock (a real estate consultant), the number of real estate developers has gone down by 60 per cent, whereas the share of branded (organised) developers in incremental supply has increased to more than 50 per cent. The organised players have branched out to Tier II cities as well, which has added to the rising demand. This has improved the overall investor sentiment towards the sector.

What the future might hold
In the recent investor presentation of HDFC (Q3 FY23), the housing finance juggernaut showed how houses have never been more affordable for Indians. At least, not in the last 25 years.

According to the data published by HDFC, the affordability ratio of its clients has been on a gradual decline.

For those who are not familiar, the affordability ratio is the ratio between a property's price and the buyer's annual income. So, the lower the ratio, the more affordable the property is for the buyer.

And this ratio has been on a gradual decline for HDFC's clients over the decade. In short, Indians are earning more, and thus, houses are becoming affordable. And if our annual incomes keep growing faster than property rates, this real estate demand will not disappear anytime soon.

The final verdict
We are not the ones to argue with numbers. And the numbers say the real estate sector might finally be on a righteous path after years of battling structural flaws and investor distrust.

However, we are not saying that investors should blindly put their money on real estate developers. While the sector is indeed performing well, that should not be a trigger to invest. As always, do the due diligence and thoroughly research a company and its prospects before investing, regardless of the sector.

Suggested watch: How good is real estate as an investment?