When it comes to real estate investment in India, inflation has always played a crucial role in shaping the investing strategies. As inflationary pressures are usually associated with economic conditions, therefore, investors keep changing their approach to maximize the returns of investments and minimize the risk factors involved.
Given the strong impact of inflation on the Indian real estate sector, this article will highlight the importance of understanding these dynamics for both new and seasoned investors.
Impact of Inflation on Real Estate Investment
In the context of the real estate sector, inflation can influence both the cost of acquiring property and the returns on that investment. With the continuously surging inflation rate in India, the cost of raw materials, labour and other inputs has gone up. Such a situation can turn out to be both negatively and positively rewarding for investors across the country. Above all, inflation has a critical impact on borrowing costs, particularly through rising interest rates. To make sure that the high inflation does not go completely out of control, many central banks increase the interest rates, which eventually leads to rising mortgage costs.
As a result, the demand for real estate, especially in the residential segment, tends to decline as higher borrowing expenses reduce affordability. However, for investors who already own the properties, inflation can lead to escalated rental income, as rents typically adjust in line with inflation, offering a higher rate of return.
Challenges of Today’s Inflation
In the current inflationary scenario, India is posing certain challenges for real estate investors. One of the major hurdles is slowly bounding uncertainty in the interest rates.While the Reserve Bank of India has been careful in its policy efforts to control inflation, further higher interest rates cannot be fully ruled out. In this veiled uncertainty, it is much more difficult for investors to make long-term funding plans.
Another issue lies in the removal of indexation benefits on long-term capital gains on investment in immovable property. This recent policy shift during the announcement of Union Budget 2024-25 makes real estate a less appealing option, particularly for individuals seeking to minimize their tax liabilities. Without the ability to index the property’s purchase price, the taxable amount on profits increases, resulting in higher taxes owed on the gains.
Strategic Responses: How Investors are Adapting?
Considering the challenges and opportunities presented by inflation, real estate investors in India are adopting a range of strategies to protect their portfolios and enhance returns. A smart way-out is to invest in those real estate assets that are more resilient to inflation than others. For instance, commercial properties, especially those located in the well-established areas, are not as vulnerable as other assets in the industry. This is because most of the companies have long-term lease arrangements in place, which means that even if borrowing or issuance expenses shoot up, real estate revenue remains relatively stable.
Another strategy that many newbie investors are opting for is investing in properties with high rental yield potential. Everyone knows that property value rises with inflation, and so does the rental rate. So, your income will not be the subject of erosion through the effects of rising property prices.
Moreover, luxury residential properties located in posh areas generally remain in high demand. Such properties have always proven to generate better rental returns that often surpass inflation, making them an attractive investment option for everyone.
In inflationary times, diversification across different markets is very important. That’s why modern investors are increasingly looking beyond major metro areas to secondary markets and emerging growth corridors where property prices are still relatively affordable but have strong potential for appreciation.
Tier 2 and Tier 3 cities like Pune, Kochi, Ayodhya, Jaipur and others are now gaining traction as viable alternatives to traditional investment hubs like Delhi, Mumbai, and Bengaluru. These markets are offering lower entry points and can provide higher returns due to robust infrastructure development and rising job opportunities.
Future Outlook
In conclusion, inflation is driving a shift in investment strategies within India’s real estate sector, prompting investors to adopt more refined approaches to optimize returns. By focusing on resilient market segments, exploring emerging markets, and capitalizing on rental yields, investors can navigate the complex dynamics of the property market and position themselves for long-term success.
