Want to invest in real estate?Know the impact of higher repo rates on real estate

The Reserve Bank of India’s decision to raise the repo rate by 50 basis points comes just a month after announcing a 90 basis point hike in the last two reviews, and has led the real estate sector, EMI, to It is expected to affect those who are paying and looking for a home. loan. A cumulative increase of 140 basis points within 60 days could lead to higher residential real estate prices, EMI and mortgage rates, which could slow the pace of demand growth. With the US Federal Reserve (Fed) raising its benchmark rate by 75 basis points (and 130 basis points from April 2020 onwards), the RBI raised interest rates by 50 basis points in his RBI policy review today. , the interest rate has been normalized. We will work with European countries to control the free fall of the Indian Rupee against Western currencies.

So is the sector as a whole bleak following the RBI’s decision? The short answer is certainly not.

For those looking to invest in this sector, new avenues are emerging that offer stable and strong returns. Residential real estate may look less attractive, at least in the near future, but the same amount of money invested in commercial real estate can yield significantly higher returns of 9% annually.

Accessible means, such as partial ownership of commercial real estate, allow investors to preserve and grow their capital. Options like fractional ownership in the commercial sector are behind a cloud of high lending rates at a time when demand for commercial real estate is soaring as unicorns, offices, data centers and warehouses gobble up space. It seems to be a ray of hope. residential space. Industry experts estimate he could double his investment in five years.

Impact of repo rates on the real estate sector

The housing sector will bear the brunt of higher lending rates for three reasons. First, property prices are expected to rise. Second, the incidence of existing EMI can skyrocket. Third, those looking for a mortgage will have to pay almost 1 percent more than they had to pay back in April.

Mortgage rates, which stood at 6.50% in April, edged up to 7.60% in June, and are likely to revise again after this hike.

A bank’s variable mortgage rate should be compulsorily linked to an external benchmark, which for most banks is the RBI repo rate. Therefore, every amendment to the RBI repo his rate has a direct impact on the borrower’s EMI or holding period. As repo rates rise, the repo rate-linked lending rate (RLLR) also rises, leading to higher mortgage rates.

What about commercial real estate?

Many people will ask what happens to commercial real estate if residential real estate becomes an unattractive investment option. The real estate sector as a whole saw high growth in 2022 due to stagnating demand after the COVID-19 pandemic. Residential is likely to be affected by higher repo rates, but the commercial sector remains strong for a number of reasons.

Wise investors are likely to shy away from fixed income investments such as FDs and government bonds that are losing to inflation, according to industry stalwarts. Use it to diversify your portfolio.

As observed in previous patterns, commercial real estate rental yields will be boosted by a sharp rise in interest rates, making them a powerful wealth creation tool for many investors. The CRE sector has benefited enormously from fractional ownership. Partial real estate investment, a popular investment option in the US and Europe, is still in its infancy in India.

Industry experts predict strong growth over the next few years, with the volume of Grade A office space in India set to reach 1 billion square feet by 2025. A significant portion of this investment will be concentrated in fractional ownership.

In addition, the future demand seems to be strong. Partial ownership models are expected to gain momentum in the future as more multinationals expand their presence in India. Here are some reasons:

Partial Ownership: Estimated Investment to Double in 5 Years

Fractional ownership works like real estate crowdfunding, reducing the cost of entry into CRE. These instruments show how individual investors can get higher returns by investing in her CRE than in residential real estate.

By making the CRE market more accessible to retail investors, fractional ownership will not only spur investment growth, but also change the notion that the commercial sector is only for the wealthy and institutional. will also be He solved one of the biggest problems in commercial real estate, large capital expenditures, allowing smaller investors to enter the market and become a viable form of investment.

Commercial property rental yields are around 8-10% per annum, which is higher than residential property yields. Therefore, his Rs.25 lakh investment in fractional ownership could bring in rental income of Rs.2.25 lakh per annum. This will ensure a steady expansion of your assets and increase your monthly liquidity.

In conclusion, while demand for residential real estate is likely to slow, commercial real estate appears to be an attractive option for investors to preserve and grow their capital. Options such as partial ownership of CRE allow individuals to invest in a booming sector and enjoy returns of 8-10%, not only above annual inflation, but also much higher than returns from residential real estate I can do it.

(to Shiv Parekh, founder of fractional real estate platform hBits)

Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making an investment.

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