Asset Class: How to Real Estate in 2022

Jackie Pinto | February 26, 2022 | Wealth

Will luxury residential properties still crest the wave in a post-pandemic scenario? Are coworking spaces replacing commercial buildings sooner than expected? Are asset management companies a really good investment bet given the current headwinds?

For some key insights on the real estate sector we caught up with two thought leaders in the business:

Anand Narayanan – Founder of Alt Realtech, a FinTech Asset Management Platform for Alternate Real Estate Assets. (Below Left)

Ravi Machani – Managing Director at Machani Group and a third-generation business owner whose current area of focus is Real Estate Development. (Below Right)

1. What are the current headwinds facing real estate, other than the pandemic?

Anand: The significant overhang for Real Estate, prior and post the pandemic has been the excess leverage on debt by Real Estate development companies. While the enhanced sales velocity post pandemic has helped to some extent, aggressive asset monetisation and innovative productisation to enhance sales velocity remains the key answers to this issue.

Ravi: Post pandemic, consumer preferences, behaviour and buying patterns have completely changed. The pendulum has swung the other way and people are willing to spend money on premium, ready-to-move products in luxury residential, designed to live and work from home. People are not returning to the office anytime soon, so commercial and even hospitality spaces are struggling. This has resulted in distress funds out there chasing distress deals, so it’s a good time for people with liquidity but a tough time for those looking to start a new business.

2. Which sectors in India excite you in terms of growth potential in 2022?

Anand: FinTech platforms that significantly disrupt the old world order on how assets are owned/purchased, how household savings are directed to alternate investment avenues and how discretionary expenses are directed will be areas to look out for in my opinion. Traditional industries such as agriculture, rental housing, and electric vehicles are other sectors that catch my eye.

Ravi: Businesses that have life on the internet, as online is only going to accelerate after this shift. 7 to 8 years of acceleration has already happened in terms of work from home. India is strong in high-quality, low-cost domain knowledge, artificial intelligence, software and biotechnology

3. Will the coworking sector benefit as the pandemic reinforces the need for agility and flexible office spaces despite the return to normalcy?

Anand: Yes, indeed. While I don’t envisage any reduction in traditional office space leasing, I do believe the growth will be driven largely by hybrid managed offices and coworking assets. The ability of this asset class to deliver flexible size, usage time and locational diversity will continue to ensure higher rents than office tenants are willing to pay. While institutional capital is already driving the supply side investments, in time the common man too will begin to move their real estate investments from plain vanilla residential into alternate assets such as coworking offices

Ravi: Coworking is here to stay. The value proposition is simply too high. There are enough companies that need the speed, convenience and flexibility that coworking spaces offer. More and more flexible models of coworking spaces will pop up, for example, creative coworking offices in the digital, media, design and internet fields.

4. Is the current upswing in residential housing sales and launches likely to hit a new peak by 2023?

Anand: I believe the buoyancy may continue into 2023, but the attractiveness of this asset class, beyond it being for end use, will continually diminish over time, meaning, people will stop investing in residential asset class and start moving their investments into managed alternate real estate asset classes, such as hostels, managed rental housing, retirement homes, managed holiday homes, etc.

Ravi: The luxury real estate market will continue to be strong. Those who have the liquidity and resources to upgrade their lifestyles would have done so in the last 24 months. The ready-to-move luxury segment has hit an all time high velocity but will slow down in 2022 and 2023. People want to live well, and are willing to invest in “work from paradise” spaces where nature is at its best — think Chickmangalur, Coorg, Goa, etc.

5. How do you think the Indian property market is currently placed with respect to pricing, valuation and yields for investors to park their money?

Anand: Real Estate will continue to attract capital in perpetuity. However the investment preference in real estate will move from self-managed assets into alternate real estate investments managed by professional asset management companies such as ALT. Alternate assets tend to give higher annuity rental yields, which will, in turn, push capital appreciation in these assets more than traditional self-managed investments into apartments and villas.

Ravi: Unfortunately, Indian real estate is unaffordable for a lot of people. Globally people buy a home that is five times their annual salary, which is the recommended valuation. In India the number can be ten to twelve times that figure. Land prices are also very high, documentation is often tricky and the Indian construction industry is largely inefficient, driving the cost up. But it is still a good time to invest in the Indian market as it is a safe long-term investment.

7. The growing flow of FDI in Indian real estate is encouraging increased transparency. Developers, in order to attract funding, have revamped their accounting and management systems to meet due diligence standards. Your take?

Anand: “Miles to go before we sleep”. In the last five years, the markets have started separating the men from the boys, meaning the well-managed ones from the not-so. But the “Big Indian Bull Market in Construction” will continue for another 100 years and this growth cannot be shouldered just by a few big developers alone. Hence the construction cycle will continue to see participation from smaller developers too. But the emergence of professionally-run asset management companies would mean that Indians will begin to invest into real estate assets handled by asset management companies rather than invest directly. So, real estate investments will start mimicking the mutual funds industry…the common man will choose to give their money to asset management companies, who in turn will choose where and what type of alternate assets to invest in and will manage it for such investors.

Ravi: We face challenges unique to India. However, it is a stable business, and will continue to grow. The more professionals that enter, the better it is. As an industry we need to create centres for excellence in niche related skills like tile laying, masonry work, even adopting global technologies into the industry. We are way behind some countries like even Thailand and Turkey. So if we can collaborate with these countries and bring in their advanced construction technology we can exponentially improve our quality and reduce our costs.

Interviewed by Jackie Pinto

Cover Photograph via Svasa Homes

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