Capital-Starved Real Estate: A Goldmine of Investment Opportunities
The residential real estate sector, often overlooked for its capital intensity, is now presenting significant opportunities for investors. Industry experts believe this segment holds the key to substantial returns and growth.
Residential Real EstateInvestment OpportunitiesReraCapital InfluxStudio ApartmentsReal Estate NewsFeb 12, 2025
Despite the challenges, this sector is poised for growth, thanks to regulatory cleanup and increasing investor confidence.
Kalpesh Mehta, founder of Tribeca Developers, highlighted the disparity in capital influx across real estate sub-sectors.
'If you look at other sub-sectors like office, data centers, or retail, there is plenty of equity money coming in.
However, residential real estate still lacks this kind of equity capital.
From an investment standpoint, equity in residential real estate is a much better opportunity compared to investing in office or data center projects,' Mehta said.
The Real Estate Regulatory Authority (RERA) has played a crucial role in cleaning up the sector, making it more attractive for investors.
Mehta believes that while the opportunity is vast, not enough investors are tapping into it.
'RERA has significantly cleaned up the sector, and there is an incredible opportunity in residential real estate.
However, not enough people are exploring this potential,' he added.
The residential real estate segment accounts for the largest share, about 75-80 percent, of the total real estate market.
Real estate investments have accounted for approximately 14 percent of all alternate capital investments over the past decade, amounting to $56 billion.
In 2024, the Indian real estate sector saw a remarkable 65 percent increase in land transaction volumes, indicating strong investor confidence and a robust market environment.
Sharad Mittal, founder and CEO of Arnya Real Estates Fund Advisor, pointed out that the lack of capital in the residential sector is influenced by regulatory and market structures.
'The lack of capital in residential real estate is due to regulations and the structure of the capital market,' Mittal explained.
Sonu Jalan, managing partner of Kotak Real Estate Fund, emphasized the unique value creation in the residential sector.
'Eighty percent of value creation happens in residential real estate, which is quite unique globally.
Indians, in particular, have a strong preference for owning their homes,' Jalan said.
He noted that the sales value of the residential segment in the last calendar year was over $80 billion, compared to $8 billion in commercial real estate.
Despite the potential, developers have had to be creative to generate self-capital.
' Developers have been creative in generating self-capital through land collaborations, daily operations, and even reaching out to friends and family overseas.
This is how they are building most of their developments,' Jalan added.
Vipul Roongta, managing director and CEO at HDFC Capital Advisors, acknowledged the risks but also highlighted the opportunities.
'While more people have lost money investing in residential real estate than those who have made money, the opportunities are still there,' Roongta said.
Industry experts are also optimistic about potential growth in other segments like hospitality, data centers, warehouses, and rental housing.
Mehta pointed out a specific niche that is gaining traction.
'There are almost no studio apartments, despite the high demand.
The biggest reason was the low yields in residential real estate, typically 2.5-3 percent, compared to the cost of debt, which was 7-9 percent.
However, we are now seeing a shift, with these units offering an 8-10 percent yield.
I see an explosion of this asset class as a new category coming in,' he added.
Industry leaders are confident about the sector's future.
'We feel more confident now.
The market is more disciplined, and we are on a stable path,' Jalan said, summing up the industry's optimism.
Frequently Asked Questions
What is the main reason for the lack of equity capital in residential real estate?
The lack of equity capital in residential real estate is primarily due to regulatory and market structures, as well as the historical risk associated with this sector.
What percentage of value creation happens in the residential real estate sector?
Eighty percent of value creation happens in the residential real estate sector, making it a unique and significant market globally.
How have developers been generating self-capital in the absence of equity investments?
Developers have been creative in generating self-capital through land collaborations, daily operations, and even reaching out to friends and family overseas.
What new trend is emerging in the residential real estate market?
There is an emerging trend towards the development of studio apartments, which are expected to offer higher yields, around 8-10 percent, compared to traditional residential yields.
What are the other segments of real estate that are expected to grow in the future?
Industry experts are optimistic about potential growth in segments like hospitality, data centers, warehouses, and rental housing.
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