Do you want to invest in real estate? Know how rising repo rate can impact real estate
The Reserve Bank of India’s decision to raise the repo rate by 50 basis points, just a month after announcing a 90 basis point hike in the last two reviews, is expected to impact the sector real estate and those paying EMI or looking for housing loans. A cumulative rise of 140 basis points within 60 days could dampen the pace of demand growth, as it could lead to higher residential property prices, EMIs as well as home loan rates. While the US Federal Reserve (Fed) is raising its benchmark interest rate by 75 basis points (and since April 2020 it has raised 130 basis points), the RBI has raised rates by 50 basis points across the board. review of today’s RBI policy to bring rate parity with European countries and control the Indian Rupee’s free fall against Western currencies.
So, is everything gloomy for the sector following the RBI decision? The short answer is definitely no.
For those looking to invest in the sector, new avenues have emerged that are stable and offer strong returns. Although residential properties may seem like a less attractive option, at least for the foreseeable future, investing the same amount in commercial real estate can instead generate significantly higher returns of 9% per year.
Accessible instruments such as co-ownership of commercial real estate allow investors to preserve and grow their capital. At a time when demand for commercial real estate is on the rise with unicorn corporations, offices, data centers, warehouses devouring space, options like condominiums in the commercial sector seem to be the silver lining behind the clouds. bleak high lending rates in the residential space. Industry experts even estimate that one could double his investment over a five-year window.
How the repo rate will affect the real estate sector
The weight of the rise in lending rates will be borne by the residential sector for three reasons. First, property prices are expected to rise. Second, the rate of existing NDEs is likely to skyrocket. Third, those looking for home loans will have to pay almost a percentage point more than they would have had to pay in April.
Mortgage rates, which were 6.50% in April, moved closer to 7.60% in June and could be revised again after this rise. Consecutive increases in repo rates extend the duration of EMIs.
A bank’s floating home loan interest rates must be tied to an external benchmark, which for most banks is the RBI repo rate. Thus, each revision of the RBI repo rate has a direct impact on the borrower’s EMI or duration. When the repo rate rises, the repo rate-linked lending rate (RLLR) also rises, causing the interest rate for home loans to rise.
What about commercial properties?
Many would ask, if residential real estate becomes a less attractive investment option, what about commercial real estate? The real estate sector, as a whole, experienced strong growth in 2022 due to pent-up demand following the COVID-19 pandemic. While residential may be affected due to the rising repo rate, the commercial sector will continue to be buoyant for a number of reasons.
According to industry stalwarts, sophisticated investors are likely to shy away from fixed income investments such as FDs and government bonds that lose to inflation. The smart move at this point will be to diversify their portfolio into higher yielding assets like commercial real estate.
As observed in previous models, rental yields in commercial real estate will be pushed higher by the sudden rise in interest rates and will become a powerful tool of wealth creation for many investors. The CRE sector has received a huge boost from fractional ownership. A popular investment option in the US and Europe, fractional real estate investing is nascent in India.
Industry experts estimate that there will be strong growth in the coming years and that the volume of Class A office space in India will reach 1 billion square feet by 2025. A considerable part of this investment will would focus on condominiums.
Moreover, its future demand also looks robust. With more multinationals expanding their presence in India, the fractional ownership model is expected to gain traction in the future. Here are some reasons:
Fractional ownership: estimates of doubling investment in 5 years
Co-ownership has reduced the cost of entry into CRE, functioning almost like crowdfunding for real estate. These instruments have also shown how retail investors can earn higher returns by investing in CREs compared to residential properties.
By making the CRE market more accessible to retail investors, co-ownership not only stimulates increased investment, but also changes the notion that the commercial sector is only for high net worth and institutional investors. It solved one of the biggest problems in commercial real estate, namely high capital investment, thereby encouraging small investors to enter the market and making it a viable investment format.
The rental yield of a commercial property, around 8 to 10% per year, is higher than the yield of a residential property. Thus, an investment of Rs 25 lakh in condominium has the potential to generate Rs 2.25 lakh per year in rental income. This leads to a steady expansion of wealth and better monthly liquidity.
In conclusion, while residential real estate could experience a slowdown in demand, commercial real estate appears to be an attractive alternative allowing investors to preserve and grow their capital. Options such as fractional ownership of CRE allow individuals to invest in a booming industry and enjoy returns of 8-10% that not only beat annual inflation rates, but are also significantly higher than the returns of residential properties.
(By Shiv Parekh, founder of hBits, a fractional real estate platform)
Disclaimer: This is the personal opinion of the author. Readers are encouraged to consult their financial planner before making any investment.