For ages, gold and houses have been the preferred bet of retail investors who considered these instruments safe compared to other forms of investment. This also formed the premise of the Indian real estate industry which now has millions of residential units across the country. However, the emergence of new tools such as Real estate investment trustsinvestment in shares of listed companies and co-ownership have led the younger generation to turn to commercial real estate (CRE).
Why? Simply put, commercial real estate offers 3x more returns than residential real estate. According to industry research, annual rent appreciation for commercial properties has been in the range of 8-11%, compared to 1.5-3.5% for residences. That being said, residential and commercial are equally important and effective investment instruments.
Choice between priorities and aspirations
A house is the third important pillar of the roti-kapda-makaan trinity (food, clothing and shelter), a saying popularized and iconized by the film of the same name and which has been both a necessity and a priority for Indians. The COVID-19 pandemic has simply cemented the need to own a home as the world becomes increasingly uncertain. This love for homes has also driven retail investors to own a second home to expand their investment portfolio, qualify for tax refunds, and own a vacation home, among various factors.
While buying a home remains the top priority for retail investors looking to invest in real estate, commercial real estate has been a ambitious investment for the detail class. This is mainly due to the high entry level investment required, the exposure to CRE only in large conurbations and the lack of awareness of quality assets. And this is where new age tools such as REITs, fractional ownership, stock market ownership, etc., have allowed retail investors to participate even with low ticket sizes. This, coupled with commercial real estate expanding its presence in Tier II and III cities post-pandemic, provided an excellent opportunity for retail investors to place a bet on commercial real estate.
Generational differences in real estate purchases
Interestingly, industry reports suggest that it is the younger generation who are leading this change with digital investment vehicles allowing them to choose from a wide range of options.
According ANAROCK Consumer Sentiment Survey S2 2021, the percentage of those who are seriously considering buying a home in the age group of 45 and under has increased significantly in 2021 (67%) compared to the 1990s and 2000s.
This represents a considerable shift in general preferences since the early 1990s when real estate buying was led by the 45-55 age group who preferred to buy homes using savings and the 2000s, where buyers in the 35-45 age group saw the most buyers motivated by better tax benefits and easier access to mortgages. The early 2000s, however, saw minimal turnout from the 25-35 age bracket – a trend that appears to be reversing today where the top 25 percent of respondents in the 25-35 age bracket were serious about buying a house.
Slowdown in residential real estate investment in India
Weak price growth since 2014 has weighed on returns from residential property investments in India. In fact, the compound annual growth rate of residential real estate investment fell by 0.7% and 0.5% in the Mumbai Metropolitan Region and the National Capital Region respectively.
Moreover, while low price increases and rising incomes have improved housing affordability in Indian cities since 2014, rents have remained stable or increased only slightly and therefore rental incomes (graph below). below).
Residential commercial pips for rent, long-term returns
The last decade has institutionalized the concept of passive income and many retail investors are turning to real estate, especially residential, in search of continued monthly income. Although both asset classes have their advantages and disadvantages, it is the CRE that takes the cake with advantages far superior to those of residential, namely a higher annual rental appreciation of around 8 to 11 % on average, a lifetime appreciation in asset values relative to residential which tends to depreciate after a period of time and demand which continues to outstrip supply, indicating better long-term returns.
Overall, both asset classes serve a variety of needs of diverse groups of retail investors and are useful in hedging against uncertainties, natural or man-made. And with the COVID-19 pandemic ensuring that only serious players with quality assets can play, it’s a treat for long-term investors looking to invest in either class of assets and to reap the benefits of the growth of one of the most dynamic in the world. real estate sectors.