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Unreal Estate: New normal for realty

Tenants now are negotiating their rentals from an average of 10% to 30% across major cities according to The Real Deal
Last Updated : 09 November 2020, 02:23 IST
Last Updated : 09 November 2020, 02:23 IST

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When the pandemic struck earlier on in the year, most companies that could function went into a temporary Work from Home mode and shut their offices. Commercial tenants immediately sought to reduce rentals (or a moratorium on rental payments).

Residential tenants were in a bind largely because they could not relocate - but that has since changed as WFH becomes the new normal, Real Estate demand has plummeted (except for some pockets in Bangalore and Hyderabad).

Tenants now are negotiating their rentals from an average of 10% to 30% across major cities according to The Real Deal. This is good news for a more equitable distribution of housing and lowering costs in line with falling employment certainty. However, it does leave both investors, landlords, and tenants in a bind – renegotiate, wait for good times, trump up cash for buying real estate, invest in REITs, or wait in the sidelines till the market recovers.

For landlords and tenants, perhaps decisions are simpler. If one were to leave aside the emotional aspects of owning real estate, then it becomes a real asset that generates a periodic yield or return. The real asset therefore should be treated like capital which works for you and the less vacant it is, the more it yields on the average. The landlord must keep in mind the probability of the premises being vacant and drop or increase rents opportunistically. The math is straight forward – at any price point, one month's lost rent is a drop of 8.3% of the yield.

Conversely for a tenant, a key factor is the ‘lock-in’ in a sliding market (with employment uncertainty). Keep the absolute rental low with minimum lock-in or increments in inclement economic weather.

However, as an investor/saver, real assets (including real estate) have a place in the portfolio, somewhere between a flight to safety aspects cryptocurrency/gold and the periodic returns of bonds - with the safety of underlying physical assets. But because of the large amounts involved in these assets, buying, and selling real assets is fraught with risk and cost. Therefore, instruments like REITs and InVits were created to get around problems of cost e.g. stamp duties, and to break down investments into tiny bit-sized lots. These are funds with real assets such as Buildings, Solar powerplants, roads, ports, airports, etc. as underlying assets where regular rental yield or income (net of interest or other costs and management fee, retained earnings) may be distributed to investors. Globally, there are ETFs of REITs which allow for diversification of assets and maybe even lower trading ticket size.

Currently, in India, there are very few such assets and there’s a conflict of interest issues with the asset’s owners, issuers, managers being the same entity, but the market is developing steadily and surely. Developers and asset owners seeking to raise cash to see this as a ready avenue and co-owners akin to global pension funds, and Private Equity Funds which may prefer such structure given better disclosure norms. It is advisable that such investments should form a part of the core portfolio and allocation should be well thought through. All REITs and issuers are not equal especially with developer-owned managers so some research before investing is advisable, along with an understanding of how these are priced.

To reiterate a great mind of our times John Bogle “Don't look for the needle in the haystack. Just buy the haystack."

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Published 08 November 2020, 16:18 IST

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