Invest in real estate

 Governmental aid and a renewed investor interest are pulling India’s real estate sector out from the storm of the pandemic. With the addition of REITs as the newest investment tool available to real estate investors in India, the dilemma that they are facing is no longer whether they should invest in real estate or not. It is whether they should invest in physical real estate or in liquid REIT stocks.

In other words, Indian investors in real estate have the choice of reaping the benefits of both short- and long-term dividends in line with their preferences and requirements.

Here’s a look at the contemporary investment prospects in India’s real estate to help prospective investors make a more informed choice while minimizing their risks in a turbulent, uncertain times.

Ways of investing in real estate

If you invest in real estate, you stand to receive the returns in two ways: capital appreciation and rentals. The rental yield, which is the fixed income, grows with time and keeps pace with inflation. Capital appreciation, on the other hand, increases for the most part in sync with the growth in real estate demand.

According to 'India Real Estate Report 2020', a survey conducted by bhartiavenue.com, around 82 percent of respondents confirmed that they were looking forward to buying a property in 2021. The decrease in home loan rates, attractive offers by lenders and builders coupled with a reduction in stamp duty charges in Maharashtra and are some of the reasons encouraging people to invest in real estate in the post-pandemic landscape.

Real estate properties, however, are highly illiquid assets, i.e., they cannot be converted into cash immediately. Further, investing in real estate units is capital intensive and investors typically do it with a long-term plan in mind. For the longest time, investors looking to reap short-term dividends refrained from investing in property because of these reasons. The recent introduction of investment tools such as REITs and InvITs is increasingly changing this dynamic.

REITs or real estate investment trusts are companies that own and operate real estate and infrastructure projects to generate income. They offer investors an opportunity to possess stocks in high-priced commercial real estate.

By leasing space and collecting rent on their real estate, REITs generate income which is then distributed to the shareholders as dividends.

Infrastructure investment trusts or InvITs, on the other hand, can be treated as the modified version of REITs designed to suit specific circumstances of the sector. Their objective is to promote India’s infrastructure sector by encouraging more individuals to invest in it. Through InvITs, investors can park their funds into infrastructure projects in two ways. They can either invest in finished projects or in projects that are under construction. Parking funds into such investment options allow investors to generate fixed returns on the same.

Both REITs and InvITs act like mutual funds and are regulated by the Securities and Exchange Board of India (SEBI). Following their inaugural launch in India in 2018, the scope of investing in real estate has become broader for prospective investors between physical property and REIT/InvIT stocks. While the choice of investment will depend on their plans and preferences, what is certain that Indian investors can now tap into a wider range of benefits. These include:

1. Stability

Unlike stocks and bonds which are affected by multiple external factors such as market fluctuations, interest rates, inflation, government policy, and regulation, real estate offers a more stable and tangible asset. Further, real estate rentals and REIT/InvIT dividends ensure a safe and assured monthly income with minimum risk of disruptions.

2. A financial leverage

Real estate appeals to many prospective investors because it is a tangible asset that can be controlled. A concrete benefit of owning a property is that you can use it as leverage in big-ticket transactions. Not only can property owners raise loans by putting their existing unit as a mortgage but also buy more properties even if they are unable to pay cash upfront at the time.

3. An asset class

Property is the only asset that allows you a 4x leverage against the actual value. Banking institutions across the world believe that a home purchase is an emotional decision and buyers rarely default on repayment of loans for this asset. For instance, you have savings of Rs 20 lakh and you’re looking to purchase a home worth INR 80 lakhs. The stock market does not allow you to play such a big bet as you cannot avail of a loan amount of 4 times the value of your existing corpus. Property is the only asset against which you can get a loan of a much higher value and pay for it in installments. The advantage is that you can slowly pay that EMI and by the time you’re done with installments, the price of the property also appreciates. It is the only investment class that allows you a 4x leverage.

4. Tax benefits

Real estate investors can also take advantage of numerous tax breaks and deductions that can help them save money during tax payments. In India, the latest round of rate changes in the GST regime has made the real estate landscape more conducive to investment activity by bringing down the associated costs of purchase. Following the changes, the GST charged on residential properties not part of the affordable housing segment has been reduced from 12 percent with Input Tax Credit (ITC) to 5% without ITC. For residential properties in the affordable housing segment, the chargeable GST is now reduced from 8 percent with ITC to 1 percent without ITC.

Also Read Why everyone must have an investment in Real Estate?

When it comes to REITs, the government has given them a pass-through status. In other words, the income that these companies generate and disburse to their shareholders as dividends will be considered as a flow-through entity, thereby avoiding double taxation.

In light of the pandemic-induced uncertainty, investors are understandably weighing multiple options before deciding where to put their money. Considering the various benefits real estate has to offer in terms of short- and long-term dividends, low risk, sector stability, and financial security, experts are expecting Indian investors to increasingly invest in this space in the foreseeable future. The best time to buy property for end use is now. The best time to buy property for investment is now. Liquid or concrete, real estate as an investment class has never disappointed.