Real Estate Investing in India for Generational Wealth

“Real estate investing in India is like a modern-day treasure hunt. With the country’s rapidly growing economy and urbanisation, there are many hidden gems to be found in the real estate market.”

India is a large and growing economy with a young and growing population. The country is also rapidly urbanising, creating new demand for housing and commercial space.

• The residential real estate market in India is expected to grow at a CAGR of 9.2% during 2023-28, according to IMARC Group.

• The commercial real estate market is expected to grow at a CAGR of 21.1% during 2023-28 in India, according to Colliers International.

• The Indian government has allocated a record ₹10.68 trillion for infrastructure development in FY 2023-24.

The real estate sector in India has witnessed “never before” growth in the past 10 years, thanks to increasing awareness in the public, and robust government schemes and policies.

Growing Demand for Real Estate and Infrastructure in India

India has a population of over 1.4 Billion people, and its population is expected to grow further. To add to it, more and more people are migrating to urban areas for better-paying jobs and a better life.

To cater to the needs of the increasing population, the Government of India has introduced several schemes like “Startup India” and “Make in India”.

These initiatives are helping young entrepreneurs start their own businesses and thus create more jobs in the country. Additionally, the growth of the IT and ITES sectors and the entry of multinational companies inside Indian Borders are also helping fulfil the job requirements.

To support and provide housing for the growing population, the government of India has also launched housing schemes like the “Pradhan Mantri Awas Yojana”, and financial inclusion schemes like “Pradhan Mantri Jan Dhan Yojana”, to empower the citizens of India and help them own a home.

As a result, the residential and commercial real estate in the country is drawing a lot of attention, both locally and globally.

It is noteworthy that there’s an important link between all of this - the infrastructure. Without the infrastructure, the movement of goods and the benefits from one market to the other is not possible.

The government of India is investing heavily in different infrastructure projects, including roads, railways, airports, and ports. As a result, the locations around these infrastructure projects are attracting real estate investors. Thus, helping the growth of the country and keeping the demand high for real estate, at the same time.

It is worth mentioning that many other factors are also affecting the growing demand for real estate in the country, both- residential and commercial.

For example, according to the National Statistical Office (NSO), India’s GDP growth rate in the first quarter of FY 2023-24 was 7.8%. The IMF and the World Bank have also projected similar rates at 7.4% and 7.5%, respectively.

According to the World Bank, India’s poverty rate has declined from 22.5% in 2019-20 to 21.9% in 2020-21; and life expectancy has increased from 69.7 years in 2021 to 70.5 years in 2022.

India’s literacy rate has also increased from 74.0% in 2011 to 77.7% in 2021, according to the Census of India.

So, what do all these reports tell us?

Clearly, the real estate sector in India is witnessing a major shift and now is expecting investments from new investors.

Who Are All These Investors in the Indian Real Estate Market?

Although India’s real estate market is still relatively young and underdeveloped, it presents a number of opportunities for investors, globally.

Being the third-largest economy in Asia and the fifth-largest in the world, India is driving high demand for real estate.

The country leads several investment charts including rental yield and capital appreciation which are amongst some of the highest in the world.

Surprisingly, rental yields in the country are significantly higher than in many of the other developed countries including the United States and the United Kingdom. And let’s not forget that India has a history of strong capital appreciation in real estate.

Besides, the Indian Government has implemented a number of reforms in recent years making real estate investments easier and more attractive for everyone.

Having said that, like any investment market, the investors in Indian real estate include Foreign Institutional Investors (FII), Domestic Institutional Investors (DII), Promoters, Retail Investors, and many more.

Here’s a broad run-through of some of these investors:

Individuals

Individual investors in real estate can be anyone from first-time homebuyers to experienced landlords. They may be investing in real estate for a variety of reasons, such as, to live in, to rent out, or to fix and flip. These individual investors generally deal in physical real estate.

Institutional Investors

Institutional investors are large organizations that invest money on behalf of their clients. They include pension funds, insurance companies, and endowments. Institutional investors invest in real estate because it can provide a steady stream of income and capital appreciation. Some renowned institutional investors in Indian real estate are Canada Pension Plan Investment Board (CPPIB), Abu Dhabi Investment Authority (ADIA), Singapore Sovereign Wealth Fund, Tata Realty and Infrastructure, Godrej Properties, Embassy Group, and Oberoi Realty.

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are companies that own and operate income-producing real estate assets. They are publicly traded on stock exchanges, and investors can buy and sell REIT shares like any other stock. For example, Embassy Office, Parks REIT, Brookfield India Real Estate Trust, Mindspace Business Parks REIT, Nexus Select Trust, and Godrej REIT are some of the popular REITs in India.

Real Estate Investment Groups (REIGs)

Real estate investment groups (REIGs) are private investment groups that pool money from investors to buy and manage real estate assets. REIGs are typically smaller and more nimble than institutional investors, and they may be able to invest in more off-market opportunities. To name a few, KKR India Real Estate Fund, Brookfield India Real Estate Fund, Square Mile Capital India Real Estate Fund, and Morgan Stanley India Real Estate Fund, are some of the popular investment groups in India.

Real Estate Crowdfunding Platforms

Real estate crowdfunding platforms allow investors to pool their money to invest in real estate projects. This is a good option for investors who want to invest, in real estate but who don't have the capital to invest in individual properties on their own. Real estate crowdfunding platforms typically have a minimum investment amount, which can range from a few hundred dollars to a few thousand dollars.

So, Where to Invest in Real Estate in India?

Real estate investing in India is like a modern-day treasure hunt. With the country’s rapidly growing economy and urbanization, there are many hidden gems to be found in the real estate market.

However, like any other investment, it is important to understand the options available and the risks involved, and then have a plan in place to navigate through and generate wealth.

Physical Assets or Physical Real Estate in India

Physical real estate is the most conventional type of real estate investment. It includes purchasing or investing in physical real estate like a house, an apartment, a plot, an office building, etc.

Investments in physical real estate can yield returns in a number of ways including, selling the asset, renting out the property, or refinancing the property to gain equity.

However, there’s a catch to investments in physical real estate.

As established already, the rental yield in India is relatively higher as compared to many of the developed countries. What this statement fails to explain is whether the rental yield is high for residential real estate or commercial real estate.

A large portion of India's relatively high rental yield comes from commercial real estate rents.

For example, the average rent for a prime office space in Mumbai is around ₹100 per square foot per month.

On the other hand, the average rent for a prime space in New York City is around $80 per square foot per month.

This means, that the rent for a prime office space in Mumbai is around 25% higher than the rent for a prime office space in New York City.

The higher rental yield for commercial spaces in India as compared to residential space is simply a result of the basic market behaviour - supply and demand.

The demand for commercial real estate in India is very high due to the rapidly growing economy of the country. In fact, the demand is much higher in urban areas where most of the companies are expanding and setting up their operations.

However, there is not enough supply of commercial real estate in the country. This is due to a couple of factors including limited availability of the land, and difficult bureaucratic processes for obtaining construction permits.

On the other hand, the demand for suburban residential spaces is high because of the growing middle class in the country. But at the same time, most of the companies do not want to set up their operations in the sub-urban areas.

As naturally as it comes, the rents are higher in urban areas as compared to the suburban areas, and this creates the difference between the rental yields for commercial and residential real estate in the country.

Real Estate Investment Trusts (REITs) in India

REITs are a new and innovative way to invest in Indian real estate. They offer a number of advantages for real estate investors, especially retail investors.

For example, they provide a way to invest in real estate without having to purchase and manage physical properties.

REITs also offer liquidity, which means that investors can easily sell their shares if they want.

Most importantly, REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which means that REITs can also provide a steady stream of income for investors.

Real Estate Mutual Funds in India

In general, mutual funds pool the money from many investors and invest it in a portfolio of stocks, bonds, or other securities.

Similarly, real estate mutual funds also pool the money from many investors. However, the investments are made particularly into real estate assets including, real estate stocks, real estate investment trusts (REITs), and other real estate-related securities. This helps minimise the risks and ensure better returns for investors.

Real estate mutual funds are similar to REITs in many ways.

For example, real estate mutual funds also offer liquidity and dividend return on investment and allow the investor to invest without owning or managing a physical property.

However, mutual funds offer more diversity in the portfolio and therefore are considered a safer option over REITs and physical assets.

Real Estate Crowdfunding in India

Real estate crowdfunding is a new and innovative way to raise money for real estate projects.

As opposed to investing in a pool of real estate assets, the way REITs and real estate mutual funds work, crowdfunding works for a single project and investors can invest as little as $500.

This makes it easier for smaller investors to invest in real estate projects that they might not be able to afford otherwise.

Notably, this form of investment is becoming increasingly popular in India.

Having said that, it is also noteworthy that crowdfunding involves higher risks as compared to REITs and real estate mutual funds. This is because the investors are not investing in many assets but a single project which, if fails, would mean losing all of their money for the investors.

Infrastructure Investment Trusts (InvITs) in India

Infrastructure investment trusts (InvITs) are similar to real estate investment trusts (REITs), the only difference being they invest in infrastructure assets, such as roads, railways, airports, and ports.

They offer investors a variety of benefits including, stable cash flow, diversification to reduce risk, easy liquidity, and professional management.

How to Invest in Real Estate in India?

For decades, real estate has proven to be a safer form of investment that not only performs better but also acts as a hedge against inflation. In fact, many financial experts advise investing and pouring surplus money into real estate for long-term gains.

However, it wouldn’t be wise to say that real estate investments are totally risk-free. Yes, they come with their own set of risks, which, in some cases, can be as high as totally losing the investment.

One of the biggest risks is the high mortgage rates. Mortgage rates in India are significantly higher than mortgage rates in other developed countries. This can reduce the profitability of real estate investments in India in some cases.

Another risk associated with real estate investing in India is the illiquidity of the market. It can be difficult to sell real estate assets in India, which means that investors may be forced to hold their investments for longer periods of time.

Here’s how you can find treasure in the Indian real estate market and navigate through it safely:

• Look for emerging markets to invest in the right kind of properties. Choose properties in desired locations with strong demand for rental housing or commercial space. India is home to a number of emerging cities that are experiencing rapid growth and development. These cities offer a lot of potential for real estate investors.

• Do your research. Understand the local market and the potential risks and rewards of investing in specific properties.

• Consider investing in infrastructure and commercial real estate. India is investing heavily in infrastructure to support the industries and commerce in the country. The returns are far more promising than residential real estate investments in India.

• Work with a local expert. They can help you navigate the market and find the best deals.

• Have a long-term investment horizon. Real estate investing is a long-term investment. Be prepared to hold your investments for at least five to ten years.

Here are some additional things to consider when investing in real estate in India for generational wealth:

• Diversify your portfolio by investing in a variety of different types of properties, such as residential, commercial, and industrial properties. This will help to reduce the overall risk.

• Invest in different locations. Don't put all of your eggs in one basket. Invest in properties in different locations across India. Some of the highest-performing markets would include Tier-1 cities like Mumbai, Bangalore, Delhi, and Jaipur. This will help to mitigate the risk of a downturn in one particular market.

• Reinvest your earnings. As your properties generate income, reinvest those earnings into new properties. This will help you to grow your portfolio over time.

By following these tips, you can increase your chances of success in real estate investing in India and build generational wealth for your family.

If you are interested in real estate investing in India, you should consult with a financial advisor to discuss your investment goals and risk tolerance.