Why real estate investors should focus on long term structural stories Rather than recovery plays

Real estate is a long-term game and that is how it needs to be played out. The trends in real estate are not generally dictated by market moves but are underpinned by structural fundamentals. The fluctuations in the economy & market can make financial assets, bearish or bullish. However, using the very same parameters to assess your real estate investments might be counterproductive. Real estate is a long-term investment and it follows sound policies and structural fundamentals. 

Scrutinize Long term Macroeconomic Fundamentals 

In an emerging economy like India, close to 8% of the GDP is run by the real estate industry. Naturally, the sector is closely linked with the long-term health of the economy. The size of the economy, per capita income, taxation policies, etc entail a major impact on the sector. 

If the economy is poised to grow in the longer run, it will result in increased employment and prosperity, thereby driving demand for realty. Likewise, a healthy economy and increased liquidity in the market will help lower home loan rates and fuel real estate growth. 

Likewise, evaluate other socio-economic parameters such as demography. Large percentages of the young population with stabilized income will drive home demand northwards. Moreover, it will also help in retail consumption and surge in investments, which will indirectly but systematically improve overall real estate. 

Local Job Market Fuel Growth

The job market in a locality is closely linked to real estate demand. Locations that are adjacent or conveniently linked to IT parks or industrial clusters enjoy higher real estate demand. This is why, when large business parks or industrial clusters are developed, it draws the attention of builders in big volume. Business parks also wield a positive impact on the social and retail infrastructure in the vicinity and foster holistic growth, which further results in spurred housing demand. 

For example, Hinjewadi and its nearby region were once an outpost of Pune with limited growth and development. Once it became a party to some of the biggest IT & technology investments, the housing industry grew multifold. The IT sector in Bangalore has been instrumental in pushing its real estate on an upswing. 

Hence, before zeroing down on an investment plan, one should evaluate the employment market in the vicinity. 

Other prime examples of local job market fuelling growth is Delhi NCR and Faridabad.

Keep Watch on the Infrastructural Growth 

The future demand in a location largely depends on the degree of infrastructural developments such as metro lines, roadways, availability of power and water supplies, proximity to railway stations and airports, etc. Heightened infrastructure development will translate into seamless connectivity, better liveability, and higher standards of living. This will naturally result in a thriving real estate market. Evidence has suggested how the emergence of the metro network has resulted in booming real estate communities in the vicinity. In the past, it has been observed that mass commute systems like the metro line not just result in a steep jump in demand but also give boost to property prices. 

Similarly, large infrastructure projects such as airports have been game-changer in terms of overall development. The international airport in Bangalore gave a makeover to the entire Northern Bangalore region by invigorating multifaceted growth & development. 

In the Delhi-NCR with Jewar airport finally moving towards actualization, the Yamuna Expressway region is witnessing an uptick in Demand. 

Infrastructure investments also steer the development of social facilities such as schools, banks & ATMs, retail options, healthcare facilities, F&Bs, and much more, thereby helping the real estate market. 

Real Estate is not about Quick Returns

Currently, we are standing at a unique juncture. While the psychological scarring triggered by the Black Swain event persists, the economy has started showing early signs of making a strong comeback. Amidst such a shifting time, it is natural that investors are intrigued. 

However, one neither needs to be intimidated by what happened a few quarters back nor become overly euphoric. 

Real estate investment is a long haul. It is generally not meant for quicker returns. To maximize the ROIs, investors need to cut through the noise and closely understand the fundamentals. It requires looking beyond the highs and lows and understanding the game in its totality. After all, once you learn the rules of the game and make moves accordingly, success follows. 

Authored by Suren Goyal, Partner, RPS Group