2023 promising time for investing in housing

CHENNAI: Investment in residential real estate is a very different kettle of fish than end-user home buying. When the intention is to return on investment (ROI), knowing how the housing asset class is performing is of prime importance. From an ROI perspective, there are two buckets to check – capital appreciation and rental yields. Let’s examine this.

Property prices: As per ANAROCK Research, the current average prices in the Top-7 cities are collectively approximately Rs 6,150 per sqft. If we look back, the last five years have seen an increase of more than 11 per cent across the Top-7 cities (from Rs 5,551 per sqft in 2018 to approximately Rs 6,150 per sqft in 2022).

If we delve deeper and consider the yearly trends in the last five years, it emerges that 2022 saw the maximum yearly rise (6%) in average property prices (Rs 5,826 per sqft in 2021 to Rs 6,150 per sqft in 2022). The previous four years, on the other hand, saw either no change or a maximum of 3-4% year-on-year increase in 2021 against 2020. Before the COVID-19 pandemic, property prices across cities remained range-bound due to a prolonged demand slowdown.

After the pandemic, demand soared across cities – as did developers’ input costs – causing prices to rise, particularly in 2021 and 2022. Another factor driving prices up is the fact that most sales happening now are by branded developers who have not shied away from price hikes on the back of strong demand and rising construction costs.

Among the cities, the southern cities of Bengaluru and Hyderabad have seen a maximum 5-yearly increase of 10% in average property prices in the last five years. Average property prices in Bengaluru stood at Rs 4,894 per sqft in 2018 and went up to Rs 5,570 per sqft in 2022. As for Hyderabad, average prices in 2018 in the city stood at Rs 4,128 per sqft and had risen to Rs 4,620 per sqft in 2022.

Rental yields: Rental yield saw a decline across most cities in 2020 when compared to 2019 – a natural fallout of the pandemic and its work-from-home and e-schooling ethos. There was some improvement in 2021, with rental yields rising across cities and nearing 2019 levels. However, 2022 saw a decent rise in rental yields, which breached pre-COVID levels of 2019 across all the Top-7 cities. This was largely due to a sudden spurt in rental demand with offices and schools reopening.

The current rental demand will remain strong in all cities as urban work opportunities rise and more people migrate to cities. ANAROCK Research indicates that Bengaluru has the highest rental yield of 3.9% among all major cities, followed by Mumbai with 3.8%.

Outlook for 2023: There is little reason to be pessimistic in the current year, though under-researched investments and a short-term profit perspective must be avoided in 2023. All the factors that drove up capital appreciation and rental yields are firmly in place, and the profitability potential for both investment rationales remains promising. That said, 2023 will face some headwinds in terms of economic slowdown and inflationary pressure, and this needs to be factored into any investment decision – including for real estate.

The RBI will likely take a pause after a spate of interest rate hikes, so growth momentum will continue. The sector will continue to be driven by end-user demand in 2023, but serious long-term investors will find the market dynamics more than favourable. Property prices are likely to rise by another 5-8% in the larger cities – this bodes well for investors focused on capital appreciation, but also means that rental demand will increase.

Because of the new demand profile, larger-configuration homes will outperform compact affordable housing. Properties by branded large developers will pay better dividends in terms of both rental yields and capital appreciation.

— The writer, Prashant Thakur, is the senior director and head of research, ANAROCK Group