The Reserve Bank of India’s decision to hike the repo rate by 50 basis points, barely a month after it announced a 90 basis points hike in the last two reviews, is expected to impact the real estate sector, and those paying EMIs or looking for home loans. A cumulative hike of 140 basis points within 60 days could dampen the pace of growth in demand, as it could lead to a hike in the price of residential properties, in EMIs as well as in home loan rates. With the US Federal Reserve (Fed) raising its benchmark interest rate by 75 basis points (and since April 2020 it has raised 130 basis points), the RBI has hiked the rates by 50 basis points in today’s RBI policy review to bring parity in rates with European countries and control the free fall of the Indian Rupee against western currencies.
So, is it all gloom for the sector following the RBI decision? The short answer is certainly not.
For those looking to invest in the sector, new avenues have emerged that are stable and offer strong returns. While residential properties may appear to be a less attractive option at least in the near future, investing the same amount in commercial real estate instead can yield significantly higher returns of 9 percent annually.
Accessible instruments like fractional ownership of commercial real estate enable investors to preserve as well as grow their capital. At a time when demand for commercial real estate is on the upswing with unicorn companies, offices, data centers, warehouses devouring space, options like fractional ownership in the commercial sector appears to be the silver lining behind the dark clouds of high lending rates in the residential space. Industry experts even estimate that one could double one’s investment over a five-year window.
How Repo Rate Will Impact the Real Estate Sector
The brunt of the lending rate hike will be borne by the residential sector for three reasons. First, the price of properties are expected to go up. Second, the rate of existing EMIs are likely to shoot up. Third, those seeking home loans will have to pay almost a percentage point more than what they would have had to pay in April.
Home loan rates which were at 6.50 percent in April, inched towards 7.60 percent in June and may see revision again after this hike. The back-to-back repo rate hikes extend the tenure of the EMIs.
Floating home loan interest rates of a bank have to be mandatorily linked to an external benchmark, which for most banks is the RBI repo rate. So, every revision of the RBI repo rate has a direct impact on the borrower’s EMI or tenure. When the repo rate rises, the repo rate-linked lending rate (RLLR) also goes up, leading to an increase in the home loan interest rate.
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, has seen high growth in 2022 because of pent up demand after the COVID-19 pandemic. While residential can get affected due to rising repo rate, the commercial sector will continue to be buoyant for a number of reasons.
According to industry stalwarts, savvy investors are likely to stray away from fixed-income investments such as FDs and government bonds that are losing to inflation. The smart move at this point will be to diversify their portfolio using higher-yielding assets like commercial real estate.
As observed in patterns before, rental yields in commercial real estate will be pushed up due to the sudden hike in interest rates and will become a powerful wealth creation tool for many investors. The CRE sector has received an enormous fillip from fractional ownership. A popular investment option in the US and Europe, fractional property investment is nascent in India.
Industry experts estimate strong growth in the coming years, and India’s volume of Grade-A office spaces will reach 1 billion square feet by 2025. A considerable portion of this investment would focus on fractional ownership.
In addition, its future demand seems robust too. With more MNCs expanding their presence in India, the fractional ownership model is expected to gain traction in the future. Here are a few reasons why:
Fractional Ownership: Estimates of Doubling Investment in 5 years
Fractional ownership has reduced the entry cost in CRE, functioning almost like crowdfunding for real estate. These instruments have also shown how retail investors can get higher returns from investing in CRE over residential properties.
By making the CRE market more accessible to retail investors, fractional ownership is not only spurring higher investment but also changing the notion that the commercial sector is only for high net-worth and institutional investors. It has solved one of the biggest problems in commercial property, ie 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, at around 8-10% per annum, is higher than the yield from a residential property. So, an investment of Rs 25 lakh in fractional ownership has the potential to deliver Rs 2.25 lakh per year in rental income. This leads to a steady expansion of wealth and improved monthly liquidity.
In conclusion, while residential real estate may undergo a slowdown in demand, commercial real estate appears to be an attractive alternative that enables investors to preserve and grow their capital. Options like fractional ownership of CRE allow individuals to invest in a booming sector and enjoy returns of 8-10 percent that not only beats annual inflation rates but is significantly higher than returns from residential properties as well.
(By (Shiv Parekh, founder of hBits, a fractional real estate platform)
Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.