Through the ages gold and houses were the most popular investment for investors in retail who believed the instruments to be safe compared to other investment. This was also the basis for the Indian real estate market that has grown to include millions of homes across the nation. But, the rise of more modern tools like the Real Estate Investment Trust that invest in shares of listed companies and fractional ownership have led to the younger generations gravitating toward commercial real estate (CRE).
Why? In simple terms, commercial estate yields 3 times more as compared to residential property. According to research conducted by industry experts the annual rental appreciation for commercial properties was between 8 and 11 percent, compared to residential properties which increased between 1.5 and 3.5 percent. However both commercial and residential are equally significant and reliable investment tools.
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Priorities and aspirations: a choice
A home is the third most important component of the rotikapda-makaan triangle (food clothing, shelter and food) the adage that was popularized and portrayed in the film that has the same title and is an absolute necessity and a essential for Indians. The COVID-19 pandemic made it more imperative to own houses in a world that is becoming increasingly uncertain. The desire for homes led to retail investors wanting to purchase a second home to increase the portfolio they have of investment options, take advantage of tax credits, and even have an apartment for vacation, in addition to many other aspects.
While purchasing a house is the most important goal for retail investors wanting to make a bet on real property Commercial real estate has become an aspirational choice for the class of retail. This is mostly due to the large amount of investment, exposure to CRE primarily in large cities, and the absence of understanding about the quality assets. This is where modern day tools like REITs and fractional ownership and stock market ownership allow investors who are retail investors to take part even with small ticket sizes. This, in conjunction with the growth of commercial real estate its reach to cities in Tier-II and III following the pandemic is a fantastic opportunity for investors who are retail to bet on the commercial real estate market.
Generational differences in real estate purchases
According to industry reports, it appears that younger people are the one that is driving this shift by investing in digital ways that allow them to pick from a myriad of choices.
According to the survey conducted by ANAROCK’s consumer survey H2 2021by ANAROCK’s consumer sentiments survey, the number of buyers who are seriously considering buying homes in the 45 and under group has increased significantly by the year 2021 (67 percent) in comparison to 1990s and 2000s.
This is a major change in the general attitudes of buyers from the beginning of the 1990s in which real estate purchases were driven by those aged 45 to 55 who preferred to buy homes using savings, and in the 2000s when buyers from the 35-45 age group experienced the highest number of buyers motivated by tax advantages as well as easier access to mortgages for home purchases. In the early 2000s, however, there was very little participation among those aged 25-35 which is now reversed with the figure of 25 percent respondents in the 25-35 age bracket were keen on buying houses.
A slowdown in residential real property investment in India
The slow growth in prices in 2014 has reduced the returns of residential real investment in India. In reality the compounded annual rate of residential real estate investment dropped to 0.7 as well as 0.5 percentage in Mumbai Metropolitan region and the National Capital Region respectively.
Additionally, even though lower price increases and higher incomes have helped to improve affordability of housing within Indian cities , rents have remained relatively stable or only increased minimally, resulting in a decrease in rental income (chart in the below).
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Commercial beats residential in rent, long-term return
The last decade has consolidated the idea that of the concept of passive income and vast swathes investors are shifting to real estate, especially residential, in pursuit of steady monthly income. Although both types of assets have their own pros but it’s CRE that comes out on top with a lot more advantages over residential, including greater annual appreciation of rental properties that ranges from 8 to 11 percent, a the lifetime appreciation of assets over residential, which tends to decrease over a set period of time and demand that is always higher than supply and yields higher long-term profits.
All in all the two asset classes are able to meet the demands of various types of investors, and help in the protection against risks, whether caused by nature or man-made. With the COVID-19 epidemic that ensures only serious investors with high-quality assets can play, it’s a great opportunity for investors who are in the long-term who wish to invest in any of these asset classes and profit from the expansion that is one of fastest-growing real estate sectors.
