Decoding the Real Estate Market in India, Brick by Brick.

07 Nov, 20239 mins read
Decoding the Real Estate Market in India, Brick by Brick.


Real estate is one of the industries with the highest international recognition. After the agricultural sector, real estate is the second largest employer in India. The augmentation of the business environment coupled with the rising demand for office spaces and housing in urban and semi-urban areas are excellent compliments to the sector's advancement. 

In terms of direct, indirect, and induced efforts in all sectors of the economy, the Indian real estate sector ranks 3rd among 14 key industries. The industry benefits from rapid urbanization, it is anticipated that by 2025 and 2035 respectively, 542.7 million and 675.5 million Indians will reside in urban areas.

The real estate market in India is a dynamic ecosystem that reflects the fast development of the country. This ecosystem brings along with it an abundance of investment opportunities, from vibrant urban centres to tranquil suburban settings. The allure of real estate investing extends beyond the material, it's about securing a solid future one property at a time.

Just as fibre is important in a balanced and healthy diet, real estate acts as the fibre in your asset allocation, it provides the option of monthly income, tax benefits and of course capital appreciation.

In this blog, we will look at the current market trends, explore the sectors driving dynamics, and understand the factors that influence the real estate market in India, We will also look at how real estate can be a hedge against inflation. We will understand the types of real estate and strategies for successful real estate investing. We will also try to unravel the complexities of taxation in real estate investing and do a sneak view of the future of real estate investments in India.

Demystifying Real Estate Investing in India

As the saying goes, you never lose while investing in real estate in India, at the most there will be some mismatches in the cash flow. Whoever mentioned that and in whatever context, one thing is certainly true, despite the sector going through its own set of challenges, it has consistently invited domestic along with offshore investments and of course, there was money to be made.

Let's check out some facts on the sector and the growth that it has seen and is anticipated to see in the future. In FY 23, the value of home sales in India reached an all-time high of Rs. 3.47 Lakh Cr (US$ 42 Billion), showing a solid 48% annual growth, the sales volume also showed strong growth with a 36% rise to 379095 units.

Experts predict that the Indian real estate market will reach US$ 1 Trillion by 2030 and the real estate sector would contribute 13% -14% to the country’s GDP. The real estate sector has got a strong impetus backed by the Government of India’s ‘Housing for All’ initiative in 2015 and the efforts put in are expected to bring in US$1.3 trillion investment in the housing sector by 2025.

The major factors that impact the growth of the Indian real estate sector are favorable Government policies, a rise in employment rate, lower or controlled inflation and overall GDP growth. 

Thanks to the robust structural foundation, increasing demand, and declining home rates, the Indian real estate market gained positive traction in 2022. In addition, a rise in income level, expansion of labour markets, and growth in commercial activity have all contributed to an increase in housing demand, as evident from the numbers shared above.

Backed by a technological revolution in the real estate industry, there is a major upsurge in the growth in tier II and tier III cities in India.

One of the latest trends in real estate in India is the smart homes, complete with features like, centralized control systems, voice-activated assistants, smart lighting and automated security systems. The increased security and comfort that these houses provide to their residents are increasingly attracting buyers to invest in such properties.

Homes with solar panels, rainwater harvesting systems and energy-efficient smart appliances are becoming popular and setting a new trend in the real estate sector. Indians, though late in switching to smart homes, are still adopting the trend gradually and in a matter of a couple of years the same would be a common real estate investment option in major cities.

The Indian Government has brought in several favourable policies to simplify real estate investing in India, the Government has taken some major steps to bring about accountability and transparency in the sector. One of the key regulations that the Government has passed is the Real Estate (Regulation and Development) Act, 2016 (RERA), which has had an extremely positive effect on the industry. Along with RERA, the tax advantages that the Ministry of Finance has brought in have made it more attractive to invest in real estate in India.

Key Benefits of Real Estate investments in India

One of the key benefits of investing in real estate is the potential to generate a regular cash flow through rental income, though the rental incomes in smaller towns increase at a slower pace, in the metros and semi metros the same increases with demand.

Another major benefit are the tax advantages for real estate investing in India, there are several tax benefits to real estate investing and these benefits considerably reduce the tax liability of a home buyer. 

As mentioned earlier in this blog, diversification is also one of the major benefits of real estate investing in India, the correlation between real estate and other asset classes is very low, at times even negative.

Several investors consider real estate investments as a hedge against inflation since historically the property price growth and annual rental income have surpassed inflation.

Real estate valuations also rise when the market price of properties in the location rises, such price rise may be influenced by the demand and supply of properties in the location which is propelled by rising employment rates, a rise in incomes and easier options for borrowing.

Types of Real Estate Investments in India.

The definition of Real Estate would include the following categories of properties.

  1. Residential Properties
    The category includes apartments, single-family houses, multi-family houses and villas. From an investment perspective, each of these options provides a variety of opportunities. For instance, the cost of a well-built villa or a stand-alone house appreciates over time due to the appreciation in the land value and the durability of the structure. But on the other side after 10-15 years of use, the cost of an apartment may not show similar growth, these need to be sold within 5 to 7 years.
  2. Commercial Properties
    This category would include properties where business activities take place, like malls, schools, offices, hotels etc, such Real Estate investments entail large investments much more than in residential properties. However, the appreciation in value of the property is likely to be greater. These Real Estate investments would require a certain amount of experience and expertise. Additionally due to the nature of the property Indian banks would provide funding for typically 50% to 70% of the value of the property and may also require some collateral, thus the initial down payment is large.
  3. Industrial Properties
    Industrial properties include those structures and facilities that are used for manufacturing goods and warehousing. These are located outside city limits so as to minimize the negative impact of industrial pollutants on the citizens. These are expensive to invest in and estimating their correct cost is also a tricky affair. Though in most cases such properties are converted from farmlands to industrial real estate, their prices may have a significant margin to the neighbouring farmlands. Renting such properties is difficult and so are the government regulations.
  4. Investments in Land
    Investments in land are by far the cheapest and most secure way of investing in Real Estate in India. It takes off the worries related to theft, damage and maintenance, at the same time its difficult to get a passive income from them. However, it has prospects of generating handsome capital appreciation in the future.

On the flip side, it has some negative aspects as well, loans taken on land purchases are often charged at higher interest rates as compared to those properties where the structure is completed, additionally, there won't be any tax savings on the principal paid.

Real Estate Investment Trusts (REIT’s)

REIT’s or Real Estate Investment Trusts are relatively new in India, basically, they are companies that own and operate real estate assets for generating income. They manage large, high-value real estate. They typically collect the rent on such leased premises and distribute the same among their shareholders in the form of dividends and income. 

REIT’s allow investors to acquire major high prices properties at a fraction of their cost and earn dividend income and eventually capital appreciation.

REIT’s can be invested into by large as well as small investors, smaller investors may form a group and pool their money and invest into some large commercial real estate projects.

Let's look at some Successful Strategies for Real Estate Investing.

  1. Thorough market research and due diligence.
    It’s imperative to carry out thorough market research before investing in any asset and real estate is no exception. One needs to study current trends, the valuation of various properties, the local economy and the location of the asset.BY exercising due diligence, one can be sure that one has a thorough understanding of the market dynamics and can thus make wise decisions.
  2. Strategic location selection and analysis
    The location plays a crucial role in the success of any real estate investment. Strategic selection involves assessing areas with growth prospects, sound infrastructure and easy accessibility. Checking the location for upcoming development projects like employment possibilities, and amenities offers significant insights into the property’s potential for future appreciation.
  3. Exploration of financing options and investment strategies
    The cost of real estate investment can be significantly high, thus it’s important to look into financing options. This includes understanding loan conditions, loan rates and alternative financing options. Success depends on developing an investment plan that is specific to your financial goals, whether they involve long-term rentals, fix and flip projects, or commercial properties.
  4. Proficient risk management and formulation of exit strategies
    Investment in real estate is not without risk, and a successful investor is one who is adept in managing risk. Identifying potential risks like market fluctuations, changes in property values, or unforeseen costs is part of this process. Making definite exit plans whether they involve selling the property, refinancing it, or switching to another investment, ensures adaptability to shifting market conditions and unforeseen challenges.

Let’s understand the Risks and Challenges in Real Estate Investing

  1. Market volatility
    Economic conditions, interest rates and regional and local factors can fluctuate and have an impact on property values.
  2. Financial uncertainties
    Depending on external finances comes with risks related to volatility in interest rates, availability of loans and the impact of sudden economic downturns on the terms of financing.
  3. Operational challenges
    Managing rental properties comes with ongoing obligations like maintenance, tenant issues and regulator compliances.
  4. Liquidity issues
    Real estate investments provide low liquidity when compared to other types of investments, making it difficult to access money in a short time because it can take time to sell a property.
  5. Regulatory and legal complexities
    Real Estate investments are governed by several laws, and legal problems, like zoning changes, government acquisition for development projects and land ownership issues can impact profitability.

These are important risk factors that investors should navigate and take into account when engaging in real estate ventures.

Tax benefits while investing in Real Estate

Under section 24 of the Indian Income Tax Act 1961, individuals can claim deduction on both home loan principal and interest payments, thereby reducing their taxable income. This benefit extends to a maximum of INR 2 lakhs on interest paid an additional INR 1.5 lakhs on principal repayment is available under section 80 C of the Act. 

Investors can also benefit from Capital Gain tax advantages, particularly from long-term capital gains arising from the selling of properties, these benefits can be availed by reinvesting the gains in another property or investing into certain specified bonds issued by various Government institutions. 

Those who are investing for the first time in a residential property can gain an additional deduction of INR 50000, on interest payments under section 80EEE. 

Investments in affordable housing and rental income from properties also offer specific tax deductions, making real estate a favorable investment option. 

Keeping updated on the latest tax guidelines and if required seeking professional advice from a tax consultant can help investors make the most of the available tax benefits while staying compliant with the tax laws.

The government's affordable housing programs and rising homeownership awareness have caused the affordable housing market to expand significantly. People have realized the advantages of home ownership over renting over the long term. The sector has experienced significant expansion as a result of rising earning potential, a need for a higher standard of living, a growing base of aspirational customers, and their changing lifestyles. 

The luxury housing market will experience increased demand in the years to come with appropriate economic growth. Government-sponsored programs, affordable rental housing complexes, and stamp duty reforms will all help investments in the real estate grow while also helping the many people who lack access to it.

Another trend that has shown significant growth in recent years is the coworking segment, this segment has successfully adjusted to the evolving nature of the workforce and will continue to meet the needs of a young, developing India. By the end of 2023, the coworking market in India is predicted to reach 50 million square feet, a rise of 15% year over year.

The real estate industry in India is also seen an increasing emphasis on sustainability and green construction as environmental issues gain importance globally. Green buildings are not only environmentally responsible but also cost-effective in the long run, making them an appealing option for investors and homebuyers alike. To reduce the environmental impact of buildings, developers are increasingly adopting eco-friendly practices like rainwater harvesting, solar power, and waste management.

disclaimer: the information provided in this blog is for general informational purposes only. it should not be considered as personalised investment advice. each investor should do their due diligence before making any decision that may impact their financial situation and should have an investment strategy that reflects their risk profile and goals. the examples provided are for illustrative purposes. past performance does not guarantee future results. data shared from third parties is obtained from what are considered reliable sources; however, it cannot be guaranteed. any articles, daily news, analysis, and/or other information contained in the blog should not be relied upon for investment purposes. the content provided is neither an offer to sell nor purchase any security. opinions, news, research, analysis, prices, or other information contained on our blog services, or emailed to you, are provided as general market commentary. stack does not warrant that the information is accurate, reliable or complete. any third-party information provided does not reflect the views of stack. stack shall not be liable for any losses arising directly or indirectly from misuse of information. each decision as to whether a self-directed investment is appropriate or proper is an independent decision by the reader. all investing is subject to risk, including the possible loss of the money invested.

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