core sector communique

Real estate is now a safer bet

Customers are moving to real estate as a safer investment and the prices in real estate are also reasonable in today's context. - K. E. Ranganathan, CEO, Diversified Business Group, Mugugappa Group, Chennai

The common perception is that a booming stock market leads to other markets — particularly real estate —flourishing, as investors plough in the profits. But with the capital market facing uncertain times for the past three years, the question if it has affected the real estate industry, which is facing its own problems caused by high interest rates, rising raw material costs and huge increase in land price, has been raised.

In an interview Mr K. E. Ranganathan, CEO, Diversified Business Group, Murugappa Group, Chennai, shares his views on the impact of the capital markets on the real estate sector and how the industry is faring. Excerpts:

The stock market has been facing turmoil for a while now. Has that impacted the real estate industry in general, and particularly in IT hotspots like Bangalore, Chennai and Hyderabad?

While there is no direct co-relation between a stock market fall and real estate fall, there is definitely a sentimental connection between both. History clearly demonstrates that whenever the stock markets fall, after a lag of 3-6 months, the real estate markets will also fall. The reason appears to be the slowing down of the economy, which leads to poorer results of companies, leading to a drop in the share market. The economic slowdown will have an impact on the savings of customers. Housing is the second priority for youngsters (after a vehicle). When the job market gets tough, and salaries remain flat, the savings come down and people tend to postpone big purchases like homes.

What is the buyers' profile in terms of age group and the property segment in which this is felt?

Young buyers in the age group of 30-35 go in for mid-segment homes. The premium market remains unaffected as the buyers belong to the HNI (High Networth Individual) group and hence do not get unduly worried regarding the share market fall. The HNI buyers buy for social status and not as an investment.

Are these buyers, end-users or those who want to use their surplus cash for speculative buying? If speculative, for how long do they hold on to properties?

The speculative buyers have practically vanished from the market as it is no more attractive from the returns' perspective. The genuine buyers alone are in the market. The speculative buyers are now investing their funds in gold and other safe haven securities. The speculative buyers usually hold their properties for 6-12 months. They book at the launch stage and exit before the possession is given.

Do you see any significant default in payment by the buyers when the stock markets are down? If so, how does the industry deal with the situation?

There are marginal delays in payment. We cooperate with the customers and get the payment as soon as possible. We help them by tying up with leading property lenders like HDFC.

Have you seen evidence of people looking for safer investments like real estate after they have burnt their fingers in investing in stocks?

There is a tendency among people who invest in shares to move away to safer investments like real estate and gold. When it comes to real estate, the investors look for good developers who deliver on promise.

They are wary of developers who promise the moon and under-deliver. Also, the reputation of the builder is keenly watched by the customers. Definitely, there are customers who are moving to real estate as a safer investment.

The prices in real estate are also reasonable in today's context, where there is scope for appreciation. The rental yields are approximately 3-4 per cent, which is also relatively good. With an appreciation of 6-8 per cent per annum, there is good scope to invest in real estate.

What are the cities where there is increased investor interest in investing in real estate? How much increase, in terms of percentage, have you seen in purchase/enquiries compared to normal times, that can be linked to stock market downturn?

Cities like Chennai, Hyderabad and Bangalore in the South, and cities like Mumbai, Delhi, Lucknow, Bhubaneswar and Patna have witnessed good consumer response for real estate. The increase in demand will be of the order of 5-7 per cent in recent times, after the stock market downturn.

Generally, builders speak of speculative purchases coming down and demand being driven by end users. In which price segment is this more prevalent — high-end or mid-priced segments?

There is definitely a pattern of more genuine buyers coming into real estate investment. They buy for staying or for renting. The mid-segment and affordable segment are witnessing good demand. Similarly, the luxury segment, the offering being low, is also witnessing good demand. The slowdown appears to be more in the upper middle segment (prices of more than Rs 1 Cr), where the buyers are few.

They go for second-hand, as it is more affordable for them. The luxury segment (price of Rs 5 Cr-plus) is witnessing good demand as it is sold on status symbol and the buyer is genuine (not a speculator).

Do you expect this to continue till stock markets recover or will it last beyond that?

The real estate market has bottomed out in most of the cities. With the minimum GDP growth of 7-8 per cent, the demand for housing will gain momentum across all key segments. While the land prices are still high, the cities are expanding, and hence the new homes will get developed more in the outskirts. This will pave the way for demand going up in the outskirts. With better infrastructure and connectivity, people will start moving out of congested cities into more pollution-free, greener environments. The year 2012 will see demand picking up on the real estate front, and will sustain through the next 4-5-year cycle.