Buying a house as an investment? No need to be pessimistic says Anarock

• Investment in residential real estate is a very different kettle of fish than end-user homebuying, says Prashant Thakur of Anarock group.
  
  
• There has been an 11% appreciation in property prices in the last five years.
  
  
• Rental yields also have also gone up in top 7 cities in 2022, as offices and schools reopened.
  
  
• All the factors that drove up capital appreciation and rental yields are firmly in place, says Anarock.
  

A recovery in property prices and rise in rental yields in 2022 has made investing in residential properties attractive yet again, according to a report by Anarock, a real estate consultant. Last year, property prices went up by 6% across the top 7 cities. In contrast, property prices in 2021 remained either constant or appreciated by 3-4% maximum.

Over a five-year period, however, an 11% property price appreciation was seen across the top 7 cities – rising from an average of ₹5,551 per sq ft. in 2018 to approximately ₹6,150 per sq ft in 2022.

“Investment in residential real estate is a very different kettle of fish than end-user homebuying. When the intention is returns on investment, knowing how the housing asset class is performing is of prime importance. From a return-on-investment perspective, there are two buckets to check – capital appreciation and rental yields,” said Prashant Thakur, head of research at Anarock group, a real estate consulting firm.

Housing sales have been slumping since 2017, which ended in huge inventory build up, which also muted growth in property prices. “Before the Covid-19 pandemic, property prices across cities remained range-bound due to a prolonged demand slowdown,” said Anarock.

The report said that after the pandemic, demand soared across cities – as did developers’ input costs – causing prices to rise, particularly in 2021 and 2022. Branded developers who now account for most of the sales, have also not shied away from price hikes on the back of strong demand and rising construction costs.

Bengaluru and Hyderabad saw the maximum 5-yearly increase – of 10% – in average property prices in the last five years in the top 7 cities, which include Delhi, Mumbai, Kolkata, Pune and Chennai.

What’s your interest rate?

The cost of owning has also gone up, especially since late last year. Since May 2022, the Reserve Bank of India has increased interest rates six times, with the latest rate hike coming in February 2023. This takes the base interest rates to 6.5%

For those who are keen on taking a loan to buy or invest in a housing property, it’s not going to be a cheap journey. Not only will they have to be ready for longer tenure loans, they might also look at pre-paying certain amounts to ensure the EMI burden isn’t too high.

“The RBI will likely take a pause after a spate of interest rate hikes, so growth momentum will continue. 2023 will continue to be driven by end-user demand, but serious long-term investors will find the market dynamics more than favourable. Property prices are likely to rise by another 5-8% in the larger cities – this bodes well for investors focused on capital appreciation, but also means that rental demand will increase,” said Anarock.

Rent versus EMI

For those who are keen on paying their EMIs with the rent they make from a property, they must ensure that such properties are in urban areas. “The current rental demand will remain strong in all cities as urban work opportunities rise and more people migrate to cities,” the real estate consultancy said in a note.

In 2020, rental yields had declined across most cities compared to the year before — as a natural fallout of the pandemic. As people worked from home and children attended schools from home too, many urban salaried individuals migrated to hometowns to save on rents.

In 2021, rental yields rose but were still below 2019 levels. However, the year of 2022, with the post Covid reopening, led to a decent rise in rental yields – breaching pre-Covid levels. The sudden spurt in demand was driven by offices and schools reopening.

According to a Magicbricks report, the average home rents went up by 13.5%% in 2022. The CEO of the property portal, Sudhir Pai, also predicted that rentals could rise going ahead as prospective homebuyers may defer their purchase decisions to opt for rental homes due to rising interest rates and economic uncertainty.

‘Avoid under-researched investments’

“All the factors that drove up capital appreciation and rental yields are firmly in place, and the profitability potential for both investment rationales remains promising. There is little reason to be pessimistic in the current year, though under-researched investments and a short-term profit perspective must be avoided in 2023,” said Anarock.

However, 2023 will face some headwinds in terms of economic slowdown and inflationary pressure, and this needs to be factored into all investment decisions that also includes real estate, the consulting firm says.

It also advises that those who intend to invest should look for larger homes instead of small and compact homes – and the former will see more demand, thanks to the changing tastes of home buyers and tenants alike.

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