India's Real Estate Industry: A Booming Sector for Investors

Americans are having it bad this time of the year. Their housing prices are reaching sky high making living in cities like New York, Chicago, etc. a difficult feat. But, the exact opposite is India’s real estate industry. Ours is booming and is likely to continue with the green signs for decades. As per a joint report by Knight Frank and the National Real Estate Development Council (NAREDCO), India's real estate sector is expected to be $5.8 trillion by 2047. That's ₹479.49 lakh crore, people! 😳

Where the world is suffering horribly in the sector, India's real estate industry is booming in the best possible way.

Confused about what I am saying? If you see foreign media outlets, you will find news articles on how home prices in America are skyrocketing with alarming speed. Ooff!

If the prediction per the report "India's Real Estate: Vision 2047" is true, then India's economy will reach the gorgeous heights of $33-40 trillion by 2047.

Do you know what this means? This is the best time to purchase real estate. But, if you are just like me and not as stacked in the capital department, you can still benefit from this. All you would need to do is add 1, 2, or more real estate stocks to your portfolio.

Don’t worry! I won’t leave you stranded, dear investors (or non-investor whose chord I may have struck with this proposition and now, you'd want to start investing.) Through this article, I will guide you on how to find the right stocks for your portfolio. Along with this, we will also discuss the factors that prevent India’s real estate sector from being unaffected by the negative vibes from the neighbours.

So, buckle up and get ready because this sector looks promising.

Real Estate Industry Overview

When it comes to long-term investments, real estate and gold are the two top-ranking on the "favourites" chart. They are both tangible instruments, and this factor makes them a reliable option for investment. Alongside this, the growth the real estate market is estimated to see in the next five years makes them a reliable option. Currently, its industry’s market size is $265.18 billion (around ₹21 lakh crore). This market is predicted to become $828.75 billion by 2028 with a CAGR of 25.60%, equating to ₹68 lakh crore. It's hard to wrap our heads around this amount, right?

India is now a young sub-continent, and factors like urbanisation, improved affordability, favourable consumer sentiments and increasing aspirational need help boost the real estate sector. With four subsectors, namely housing, retail, hospitality, and business, the real estate sector creates the second-most jobs in the nation, trailing behind agriculture.

This uprising of the sector was not a constant event as the industry suffered huge losses during the Covid-19 pandemic. Strict lockdown measures mostly hit the residential sector as demand for housing loans and sales reduced. But, the industry soon bounced back with tremendous speed, showcasing astounding growth. With India becoming a nation with the largest population on Earth, the requirement for housing units is constantly rising. This is especially true for the urban population, as an additional 25 million housing units will most likely be required by 2030.

The Indian Government is also supporting the real estate industry with programs like "The Smart City Project," which includes constructing and developing 100 smart cities. All these plans are a significant reason driving the growth of the real estate sector.

Factors Driving the Growth of Real Estate Sector in India

The real estate industry boom brings forward a great opportunity for investors like you and me to work on that goal we have noted down on our retirement plans. Yes, I am talking about the “wealth-building” plan. If you are thinking of including some real estate stocks in your portfolio or investing in properties, it's crucial that you understand the workings of the sector. What makes it a better investment option than others is discussed below.

Repo Rates of the Real Estate Industry

The repo rate is the rate at which Apex Bank of India lends money to commercial banks. Currently, the repo rate is 6.50%, which RBI has kept unchanged. The repo rate has been consistently increasing for the past few years. However, RBI Governor Shaktikanta Das provided some relief to the concerned parties by announcing that it would remain unchanged for this quarter.

You must be wondering how the interest rate for lending money affects the real estate sector, right? Well, everything is connected. See, the thing is, when the repo rate rises, banks find it more expensive to borrow money. This leads to a rise in interest rates on loans by the same banks. Hence, high interest rates make it difficult for consumers to purchase houses or other properties since most do so by taking a house loan. Soon after, property prices get reduced as the demand decreases due to high interest rates. This results in slowing down the real estate market.

The complete opposite happens when the repo rate decreases or remains the same, as is the case with India right now.

India’s Economy of Real Estate Industry

India's economy and the real estate industry are codependent. Being the second largest employment sector in the nation, the real estate industry assists directly in economic growth. As of 2022, around 70 million citizens were employed in this sector. India's real estate sector accounts for about 50% of India's GDP. In 2021, India's GDP increased by 17.92% compared to 2020, following the pandemic period. This growth continued in 2022, with a 7.5% increase from 2021, as shown in the infographic below.

With the high population growth that India is facing, two things are possible. One is that the large population would support the promotion of India from being a developing country to a developed one. Or the things would backfire, and the same population hike would lead to resource depletion, unemployment, and other issues.

In short, the nation’s economy and real estate sector affect each other profoundly.

Demography of Real Estate Industry

The composition of a nation’s population, aka., its demographic representation, profoundly impacts the real estate sector’s growth. Based on the rise of the birth and death rate in India, the demand for real estate fluctuates. This, in turn, also affects housing prices and mortgage rates.

Along with this, a country's young or old population directly affects the real estate sector. Take India for example. There are 142.86 crore people residing here (as per United Nations Population Fund data), among which over 65% are under 35 years old, and over 50% are under 25 years old.
Youngsters and adults are the population who are the most likely to purchase real estate properties, either to buy their own houses or to establish offices. This is another one of the reasons for the flourishing real estate industry in India.  

So, a nation’s demography affects its real estate sector in the following ways:

• A growing population will increase the demand for housing, especially in areas with limited land supply. This can lead to higher prices.

• Conversely, an ageing population may decrease demand for housing, as older people are more likely to downsize or sell their homes. 

• A high-income level can also lead to higher demand for housing, as people with more money can afford to buy more expensive homes.

• When people move to a new area, it can create demand for new housing, especially if the migration is from rural to urban areas.

• Government policies can also have a significant impact on the real estate sector. For example, tax breaks for homebuyers can stimulate demand, while rent control laws can suppress prices.

Things to Pay Attention to While Choosing a Real Estate Stock

Companies like DLF Ltd., Oberoi Realty, Godrej Properties, Prestige Estates, etc., are some of the best real estate companies with positive stock market positionings. Yes, the upcoming years for this industry look quite good in terms of growth. But, there are still certain areas which may backfire while you are adding stocks to your portfolio. After all, it's always a good idea to be extremely cautious while investing.

Here is a list of the checkpoints to mark before pooling your money in a real estate stock:

Debt Obligations

The prospect of checking any company, either real estate or not, based on the amount of leverage it has is a complicated matter. Leverage is not always bad since every company requires capital, and debt can be considered a good decision based on the requirement. But, too much of anything can be bad, which is exactly the case with debt obligations.

To pay off the rising debt, companies often sell assets or take out cash from their operations. Real estate companies face the trouble of low liquidity due to the asset being a tangible one. Selling properties is hardly possible in a day or two, and this thing makes too much leverage for a real estate company a ticking time bomb. Therefore, always make sure to check a company's debt-to-equity ratio (D/E ratio). This ratio compares the company's total debt to its total equity. A higher debt-to-equity ratio indicates that the company has a higher debt obligation.

Let's take an example of two real estate companies, A and B. Say A has a D/E ratio of 3.0, whereas B has a 1.0 ratio. One thing you should know about the D/E ratio is that it is calculated by dividing a company's total debt amount by its shareholder's equity. If the ratio comes out to be larger than 1, it implies a high debt obligation. On the other hand, a negative D/E ratio implies that liabilities surpass assets for that company. In this case, B would be a better option for your portfolio than A.

P/E Ratio

Based on the company's earnings per share, one can determine whether a company's stock price is appropriately evaluated or not. The price-to-earnings ratio, aka., P/E ratio, is one of the valuation metrics that assists an investor in determining whether a stock is fit for their portfolio. This ratio plays a major role in determining the best real estate stocks among the horde of options present. So, make sure to check them before dropping your hard-earned money in them.

The P/E ratio is calculated by dividing the market price of a share by its earnings per share. A high P/E ratio can be a sign of investors' confidence about a particular stock and the company’s future earnings growth. It also means the company has good-quality assets, such as well-located properties, long leases, etc. This ratio represents a company’s growth potential and is also affected by the ongoing interest rates.

Real Estate Investment Trusts (REIT)

Though not a direct factor affecting the selection of real estate stocks, REITs are a great alternative and should be looked for in companies. Owning, operating, or financing an income-generating real estate property refers to REIT. It stands for Real Estate Investment Trust and is based on the grounds of mutual funds. With REIT, investors can receive profits or returns on their investments without actually buying a real estate property.

Very similar to a mutual fund, investors pool their money in a REIT company, which in turn utilises that money to maintain or purchase an income-generating property. Many of the REITs are publicly traded on stock exchanges, giving investors an option to purchase that company’s stock. One big advantage of REIT is that it gives investors the option of diversity. You can invest in REITs whose portfolio contains apartments, hotels, infrastructure, healthcare centres, etc.

REITs earn income based on the kind of business model they operate in. REITs who own and operate properties collect rents on those properties. A percentage of the generated rent is then forwarded to the investors as a form of dividend. As for the REITs who only finance real estate property, they earn capital from interests generated on those properties. A percentage of which is then forwarded to the investors as dividends. Alongside stocks, people can also invest in REITs via exchange-traded Funds (ETFs) or mutual funds.

REITs are very much influenced by the interest rates in the market and often see fluctuations in their value. Plus, the REIT investments are also affected by the condition of the properties they have in their portfolio.

If you want to know about Real Estate Investment Trusts (REITs), click on the link to read about them.

The Bottom Line

Apart from the factors mentioned above, there are other things to check while choosing stocks. The same goes for purchasing or selling properties. So, be smart and get all the information you can gather about the company you are interested in. Finology Ticker is a great source of information about all the listed companies in India.

The real estate sector is in its best position and will likely see a hike in upcoming years. That’s why it's a good time to give them your attention, but don’t forget to do so smartly and cautiously.

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.