Where does real estate stand in the next five years?

Contrary to the perception that real estate is going through a difficult phase, a report by Knight Frank Global House Price Index Q2, mentions that the prices in the residential real estate market appreciated 10.5% in the last one year or 70% (absolute) in the last five years ending June 2017. The report mentioned that the growth in mainstream residential prices across India has landed it a place among the top 10 International markets in the last one year ended June 2017.

The numbers in the report which are 10.5% in a year, which means 11.2% compounded annually. Experts are of the opinion that the granular returns in real estate are very city specific. Real estate being a heterogeneous product, the returns depends on a range of aspects like construction, location, economic scenario etc. Certain cities perform better because of factors like job creation, infrastructure development in terms of connectivity. Markets like Mumbai, Bangalore and Pune have shown a growth of 15-18% (absolute) or even more at times. But at the same time, other micro markets have underperformed with a yield of as low as 1-2% (absolute) or even less.

It is also important to note that the returns are not the same across India. The residential prices in a couple of tier 2 cities increased more in the last year as compared to the low appreciation in metros and tier 1 cities. Price appreciation happens mostly due to the construction of metro and other infrastructure projects in the cities. Residential property prices in Lucknow and Kanpur appreciated 15-18% last year while those in Kochi appreciated by 27%.

Investors consider real estate to be a safe and a favorite investment avenue. But the low returns in the past few years have made it unattractive. Further, policy actions and initiatives by the government like RERA and demonetization resulted in a temporary slowdown in the real estate activity and dampened the sentiments in the industry. The speculation about the impact of GST also slowed down the activity in the real estate sector.

It is very important to choose the right property to invest in order to generate higher returns. Demonetization and RERA will have a positive impact in the long run on the industry. Returns over the next five years can be expected to be significantly higher than in the last five years.

However, there are a few financial advisors who are skeptical and do not expect high returns for the next couple of years. While investing in real estate has its own concerns, those looking to invest in residential property for end use can make the move if they find an appropriate property. Many investors consider this a right time for an investment, but there are speculations about the time period in which returns can be expected. While some experts are of the opinion of a higher return in the next five years, many do not see any returns up to 10 years.