Wealthy or high net-worth individuals (HNIs) are doing a rethink on their real estate exposure and actively looking at reducing allocation to the asset class.
Such families, on an average, intend to invest more in equity and private equity and less in real estate and hedge funds over the next 12 months, a recent survey by Edelweiss Private Wealth Management and Campden Family Connect observes.
IIFL Wealth Index’s survey reveals that nearly a third of India’s richest individuals see property as over-represented in their portfolios.
“Most of the clients surveyed are either over-allocated or adequately allocated to real estate. Consequently, their real estate allocation could remain the same or reduce in the next 12 months,” said Anshu Kapoor, head of Edelweiss Private Wealth Management.
Real estate, which typically comprises 25-40 per cent of the investment portfolio of wealthy individuals, has got into a price and time correction in the last five to seven years due to introduction of the Real Estate (Regulation and Development) Act (RERA), goods and services tax (GST) and demonetisation, said experts.
Demonetisation has particularly hit sales of luxury housing. Sales of luxury units (priced over 71.5 crore) across the top seven cities fell 49 per cent in 2017 over the previous year, according to Anarock Property Consultants, a residential brokerage platform.
That’s not all. Low rental yields and high cost of owning property have made real estate less attractive. In 2018, residential property prices in Mumbai fell seven per cent, the highest among top eight cities, according to a report by Knight Frank, while prices in Hyderabad went up by seven per cent.
Kolkata, Pune and Chennai saw prices correct between three-four per cent, while NCR, Bengaluru and Ahmedabad witnessed prices rise by one-two per cent. Real estate investment is mostly direct or through realty fonds.
Fair price discovery is a challenge for direct investment, especially under poor market conditions or when the need to sell is immediate. Real estate funds are close ended and their performance has been mixed. “There is a supply overhang and investors are finding it difficult to liquidate their holdings at a price they would have liked,” said Devang Kakkad, head investment advisory, Equirus Wealth.
Buyers are bidding at the low-end of the spectrum looking for distress sales, said experts. “With finance companies becoming cautious, mortgaging an asset has become expensive, creating an additional hurdle to buy property,” said Tejas Patil, head-real estate services, Sanctum Wealth Management.
Wealthy investors are now turning to equities and equity-related opportunities as well as direct investment in businesses other than their own for better opportunities.
According to the IIFL Wealth Index report, 48 per cent of India’s wealthy intends to increase allocation to investment funds such as mutual funds and exchange-traded funds; 46 per cent to equities; 45 per cent to alternative investment funds (AIFs) and 36 per cent to structured products.
“As real estate has already had a higher weight in most HNIs’ portfolios, there has been a natural shift towards financial assets,” said Yatin Shah, co-founder & executive director, IIFL Wealth Management.
The tilt in favour of financial savings has become more apparent in the last two years. Savings in physical assets were around 1.4 times the gross financial savings in 2012-13. The gap has narrowed over the last two years. It was equal in 2016-17, the last year for which data is available. Gross financial savings outstripped savings in physical assets in 2015-16.
Investment commitments of AIFs touched 71.79 trillion as of June 30,2018, more than a three-fold jump from 750,441 crore two years ago. Total assets under management or AUMs of the MF industry grew 39 per cent to 722.85 trillion while portfolio management services assets surged 28 per cent to 714.88 trillion in the last two years.
Some pockets within the real estate sector are gaining traction, though. “The commercial space has become an attractive investment option for HNIs, generating fixed income. There is a rising interest for commercial leased assets in the premium office segment across cities such as Bengaluru, Mumbai, and the NCR region,” said Anuj Puri, chairman, ANAROCK.
Investors are also looking forward to a new investment option in the form of Real Estate Investment Trusts or REITs. Embassy Office Parks, a joint venture of US private equity firm Blackstone Group and Embassy Group, recently filed its draft offer document with the Securities and Exchange Board of India for its 75,000 crore REITs issue.