NRI Investors can use Indian Housing investments as hedge during troubled times: Shajai Jacob

NRI Investors can use Indian Housing investments as hedge during troubled times

The Indian real estate market right now stands in equilibrium as prices are stable across most cities in India. However, this is slated to change in the medium to long term as demand should outweigh supply over the next few years, primarily due to decline in residential launches. Sales have, in fact, overshadowed new launches in the past 4-5 quarters - signalling the revival of the sector.


The RBI reducing the repo rate by another 35 basis points in August 2019 will bring down interest rates on home loans, which should boost demand in the sector. Equities have also not been performing well in the last 3 quarters or so, making real estate lucrative for investors to park their investible surplus.


How Indians’ Favourite Investment Routes are Faring


Equities, PO schemes and banking products are in a growth crisis. Asset classes like equity stocks, government bonds, post office schemes, savings on bank deposits and bank fixed deposits are all in a downward spiral. India's macro-economic indicators have been headed southwards. Along with the downgrading of India's rating and investment outlook by global ratings agencies and associations, the overall economic sentiment remains weak.


The IMF has also downgraded India's growth forecast by 0.3% from 7.5% in April'19 to 7.2% primarily due to the slump in investment and consumer demand and mounting disinflationary pressures.  Another rating agency Moody's has cautioned that India's economic progress over the next couple of years will be weaker than in previous years. This might increase non-performing loans (NPLs) including personal credit defaults (credit card, personal loans, etc.) and cause further dampening of overall consumption volumes.


    The equity market has a bearish outlook with most Blue-Chip and Mid-Cap stock values declining and foreign investors withdrawing investments from the stock market. The majority of the portfolio management services have had negative monthly returns in June, lending a sombre outlook of the overall equity market.
    Most public sector banks like SBI have cut interest rates on fixed deposits, which means the yield on maturity will decline for FD investors. Other BFSI products like 10-year government bonds have also witnessed rate cuts.
    Interest rates on popular savings schemes like Public Provident Fund and National Savings Certificates have also been lowered, which can reduce the attractiveness of these schemes.
    Agriculture has witnessed tepid growth in the recent times. An erratic monsoon this year has hit the agriculture sector hard with nil to negative growth expected in the short to medium terms. While agriculture is not really an investment asset class for most, the performance of the agriculture sector is nevertheless a macro-economic indicator in a country like India.
    Growth in the automobile sector is almost nil and the industry is facing its biggest growth crisis in recent future. Even at the best of times, automobiles are depreciating assets and therefore not suitable investment instruments.
    Surprisingly, gold has had a bull run in recent times following the Federal rate cut, escalating trade tensions between US and China and the depreciating rupee value against dollar. The yellow metal’s prices have hit an all-time high and have crossed the INR 38,000 mark for 10gm of 24K gold. However, despite this rise, unlike in previous times, investors are increasingly sceptical on its lustre because in today’s changing times more and more people have access to modern financial systems that offer a variety of asset classes for investment. Thus, gold – now being considered a dead asset by many – is largely attractive to those who are still not aware of or don’t have access to other financial asset classes.


Real Estate – A Good Hedge in Troubled Times

Indian real estate is still a viable and fairly safe long-term investment option. Investors with a short-term view on ‘instant returns’ need to look elsewhere, but most other asset classes are quite volatile in nature and will continue to remain so.  Indian residential real estate is a long-time favourite of resident Indians and NRIs, and recent trends suggest a positive outlook for this asset class going forward. Property prices have bottomed out and cannot possibly reduce further, especially since construction costs are gradually heading north.

That aside, both the government and the RBI are making concerted efforts via various sops and incentives to revive Indian housing demand and thus boost homebuyers’ confidence. Other than the tax sops doled out in the Union Budget, there have been four successive rates cuts by the country’s apex bank which is ultimately aiding commercial banks to reduce home loan rates for prospective buyers. Thus, it is an opportune time for prospective buyers to take the plunge in the Indian residential market across budget segments, be it for end-use or for investment.

To illustrate in numbers, the top 7 cities saw housing sales rise by 32% in H1 2019 as against the corresponding period a year ago. Indian housing sales stood at 1.11 lakh units in H1 2018 which increased to 1.47 lakh units in the first half of 2019. Interestingly, MMR, Pune and NCR were the top three markets to witness the maximum yearly increase in housing sales – 62%, 50% and 31% respectively. During the same period, unsold housing inventory saw yearly decline of 5% across these top cities.