What Makes Real Estate The Most Secure Investment Class In The Post-Pandemic World?
What makes for an ideal investment? The answer may seem complicated and influenced by a wide range of factors but the decision ultimately boils down to two essential criteria: returns and risk. Before putting their hard-earned money into any investment class – whether equity mutual funds, debt mutual funds, stocks, gold, or real estate – investors must balance the risk to their capital with the returns that they can be expected to receive.
However, no contemporary discussion involving investments can be called credible if it doesn’t factor in the ongoing COVID-19 crisis and its impact on the market. As during the 2008 financial crisis, the present-day investment landscape has taken a hit. Global economies are in flux. Markets are uncertain, at best. As a result, at a time when potential investors have to be extra careful while deciding where to invest, they are unsure as to which investment class to choose.
This piece will endeavour to clear that confusion by illustrating why real estate is the most secure and lucrative investment class in a post-pandemic world.
Know Your Investment: The Benefits Of Making A Real Estate Investment
Buying real estate means acquiring physical land or property. If you invest in real estate, you stand to receive the returns in two ways. One is through capital appreciation, which occurs when the property’s value rises. The second is through rentals, which provide a steady stream of passive income for most real estate investors.
Real estate is appealing to many prospective investors because it is a tangible asset that can be controlled. If you own a property, you have a tangible physical asset that you are accountable for and can be used as leverage in big-ticket transactions. You can raise loans by putting your existing unit as a mortgage but also buy more properties even if you are unable to pay cash upfront at the time. The diversification of funds is an added benefit that you get as an investor.
The COVID Conundrum: Why Investing In Real Estate Right Now Makes Sense?
The present is the best time for investing in real estate for many reasons. To begin with, home loan interest rates are currently at an all-time low, making it a better choice than any similar investment option. Further, because the market conditions are subdued currently, the Indian government is going all out to help the economy overcome the slump; and real estate is one of the industries it will focus on supporting.
For residential properties in the affordable housing segment, GST is to be charged at 1 percent without ITC, as opposed to the previous rate of 8 percent with ITC
Several measures have already been introduced to assist the sector, which has been hit hard by the pandemic and subsequent lockdowns. For instance, the government declared the first instalment of an economic package estimated to be worth around INR 20 lakh crore. Liquidity and interest rates have been slashed, even as the schedule for suo-moto project completion and registration has also been extended by six months for projects expiring on or after March 25, 2020.
With the real estate industry pushing for more financial, infrastructural, and regulatory support, it is expected that more measures will be announced soon. From the perspective of an investor, these developments will only incentivise property purchase.
The tax benefits associated with property purchase also make investing in real estate at this time a prudent financial decision. Thanks to the latest round of rate changes in the GST regime, the real estate landscape has become more conducive to investment activity. The new tax regime levies 5% GST without Input Tax Credit (ITC) on residential properties that are not part of the affordable housing segment. This is a sharp reduction from the previous rate of 12% (with ITC).
For residential properties in the affordable housing segment, GST is to be charged at 1% without ITC, as opposed to the previous rate of 8% with ITC. The reduction in the tax rates translates into lower upfront costs borne by homebuyers, making the investment more affordable and accessible for a bigger section of prospective investors across the country. Owners of residential properties stand to gain similar advantages from the new GST regime when it comes to rentals. Following the changes, the tax now only applies on those whose rental income exceeds INR 20 lakh (compared to the previous threshold of INR 10 lakh).
Another major factor that strengthens the allure of real estate as an investment asset class is the growing purchase sentiment amongst Indian consumers. With the pandemic unleashing a wave of uncertainty and turbulence, consumers across the country are now appreciating the comfort and stability that owning a residential property brings. NoBroker.com’s India Real Estate Rent Report 2020 captured this large-scale shift towards homeownership, highlighting how 82% of the respondents were planning to buy a property in 2021. This not only marked a year-on-year increase of 18% but also underscored how the ”never settle” mindset embodied by urban Indians under 40 years of age might be giving way to a more grounded lifestyle in the wake of the pandemic.
While the pros of investing in real estate far outweigh the cons, the latter do exist and it is important for prospective investors to be aware of them. Real estate, unlike other asset classes, is highly illiquid. In other words, you do not have the ability to cash in quickly to come out of a bind. The other thing prospective investors must keep in mind is that real estate requires a substantial amount of money to be put in before it yields desirable dividends. In addition, if you let out a property, you have to find and manage tenants, as well as bear the costs of maintating the property.
Finally, investing in real estate requires lots of research and the returns are not immediate. But once you have wrapped your head around the risks involved and clinched your decision to go ahead with the investment, all that remains is to sit back, rest assured, and watch the sweet dividends ripen.