Real estate in India remains a top investment choice in 2023, owing to economic growth and Indian households’ high asset allocation. The article discusses various investment options, including luxury rentals, second homes, ETFs, REITs, and fractional ownership.
In 2023, the real estate sector demonstrated resilience to various changes in trends. The global economic recovery boosted demand for residential properties in India, thanks to low-interest rates and a preference for smart living and luxurious ownership. With India’s status as one of the world’s fastest-growing economies, fueled by private spending and capital accumulation, the real estate sector remains a popular investment destination.
Typically, Indian households allocate 77% of their assets to real estate because it provides opportunities for high growth, strong returns, and stable income streams. Furthermore, SEBI’s new directives on fractional ownership and small REITs position the sector for significant growth in 2024.
However, newcomers may navigate the real estate market and select the best investment opportunities based on current government regulations and interest rates.
This article examines various real estate investment options, investor profiles, and risk tolerances.
- Rental Properties
The traditional approach entails purchasing residential properties to generate rental income. While simple, this method necessitates significant initial investment and ongoing maintenance costs. Before investing, confirm that the property is free of legal issues. Leasing, outright purchase, and loan financing are all viable acquisition options.
Notably, there is an increasing trend of investing in luxury rental properties, particularly in major Indian cities like Mumbai, Delhi, and Bangalore. Industry data show that luxury residential real estate in these cities consistently outperforms other traditional assets, with annual price growth ranging from 4% to 7%.
- Vacation homes and house flipping
Affluent buyers are diversifying their property portfolios beyond primary residences, including lucrative second homes. In India, demand for secondary residences has skyrocketed following the pandemic, reaching a staggering $1.394 billion by the end of 2021– an impressive 88.63% increase from pre-COVID levels.
Combined with strategies such as house flipping, in which properties are renovated for increased resale value, Indians are capitalizing on their second homes by converting them into vacation homes, generating significant tourist interest.
- REIT and ETF
ETFs and mutual funds offer indirect exposure to real estate by investing in related assets. ETFs focused on real estate stocks, such as publicly-traded builders, or REITs (Real Estate Investment Trusts) are among the options.
Mutual funds and REITs raise money from investors to buy income-generating assets. These assets generate rental income, which is then paid to investors as dividends.
REITs offer many advantages, including immediate liquidity, affordability, regulatory protection, and tax breaks. REITs provide a consistent income stream that is often tax-exempt, with dividends accounting for 90% of profits.
Commercial real estate ownership is in fractions.
This novel approach entails multiple investors pooling their funds to buy commercial real estate together. This reduces individual investment costs and risk exposure while generating shared rental income. Industry experts predict significant growth in this segment, with India’s fractional ownership properties expected to reach $8.9 billion by 2025, growing at a 10.5% annual rate.
Commercial properties typically have higher rental yields than residential options. A 25 lakh investment in fractional ownership could generate Rs 2 lakh in annual rental income (8-12 percent rental yield) and at least Rs 1.25 lakh in capital appreciation, resulting in wealth creation and improved monthly cash flow.
Choosing the correct option
Several factors influence the best investment option, including available capital, liquidity preferences, preferred cash flow frequency, and risk tolerance. Owning, leasing, and flipping properties typically necessitates a significant investment of money and real estate experience.
Although ETFs offer high liquidity and low costs, they don’t pay dividends and must be sold to realize returns.
Despite still being in their infancy, REITs and fractional ownership are giving retail investors access to the lucrative commercial real estate (CRE) sector. Even though CRE offers good returns, it has traditionally required a high level of capital investment.
Fractional ownership is a lucrative opportunity, with potential annual rental yields ranging from 8 to 12 percent and internal rates of return (IRR) ranging from 13 to 17 percent. Prime properties and retail complexes in business hubs such as Gurugram, which have recently emerged as one of the most promising real estate markets, provide consistent rental income and capital growth opportunities.
This suggests that fractional ownership of commercial real estate may produce higher and more consistent returns in the long run than other options, making it an important consideration for those looking to diversify their investment portfolios and build long-term wealth.