How to make smart investments in Indian Residential Real Estate?

06/02/2023

As a prudent investor, it is essential to keep a close eye on various macro and micro economic factors that can impact your investment decisions. In this blog post, we will discuss the various aspects that you should consider before making an investment in the Indian real estate market.

Macro Scenario

The global economy has a significant impact on the real estate market, and as an investor, it is crucial to keep a tab on this. Employment trends, migration patterns, inflation, monetary policies, and geo-political situations are some of the key factors that can influence the market. Keeping a high-level view of these factors can help you time your investments better.

Micro Scenario

The local market conditions are just as crucial to consider before making an investment. It is essential to understand the supply and demand dynamics, price trends in the recent past, and the type of buyers in the market (investors or end-users). Knowing the government's infrastructural plans for the city and the locality can also give you a better picture of the growth prospects of the area.

Asset Class

Assuming the macro and micro scenarios are positive, the next step is to decide on the asset class to invest in. Commercial properties, residential apartments/villas, and plotted developments are the most common asset classes in India.

Commercial properties are known to offer higher yields (5.5-8%) compared to residential properties (2.5-4%), but they come with the challenges of higher entry costs and tenant management.

Residential properties are a popular choice, both for their emotional and financial benefits, but the low rental yields and dealing with individual tenants can be a irritant when you invest in residential.

Plotted developments are attractive for their ownership of a Divided share of land ( Not UDS) and appreciation potential, but there are concerns regarding legal clearance, encroachment and lack of rental income. Given that many branded developers are entering the space, the legal risks might get mitigated to a certain extent.

Developer Pedigree

With a plethora of developers in the Indian market, it is essential to choose wisely. RERA (Real Estate Regulation and Development Act) has forced many non-serious developers to shut shop, and the remaining developers can be categorized into Grade A, B, C, and D based on their past performance, brand recall, price premium, quality, and promoter pedigree.

While investing with Grade A developers has its advantages, such as brand power, scale of projects, and strong balance sheets, Grade B developers can offer better returns and quality delivery as they have lesser projects to focus on and are trying to build their brand positioning and focus strongly on quality. Grade C developers typically compete on pricing and give substantial discounts compared to Grade A&B. However, the risk profile of these investments is higher given the number of Grade C developers who have defaulted on their commitments.

Hence It is important to choose the right developer based on your investment goals, risk appetite, strong research, expert advise and not just hearsay.

In the next blog, we will dive deeper into -