Managing wealth: Look ahead, look wide

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Rajesh Saluja: In 2019, valuations were higher than what they are today. Since then interest rates have come down and earnings have picked up. So, this market is still sustainable, keeping aside short-term risks. The PE on a trailing basis looks expensive, but based on FY22 estimates of 35% earnings growth, the market is quoting at 25 times. Further, interest rates are not running away in a hurry, so even next year the advantages of deleveraging will play out. Even if we assume 15% earnings growth in FY23, at 21 times earnings, valuation is not expensive.

Are HNIs re-looking at real estate? Is there a preference for direct investment, or through InvITs/REITs?

Saluja: It’s both. On the housing capex side, there is real demand coming in from people who want to improve their quality of life since their incomes have gone up. It is not investment demand but real end-user demand that has changed over the past six to nine months. It’s a cycle — whenever equities surge and interest rates stay low, real estate will see a revival. Besides, the rise of quality developers over the past four years has also made structured debt funds attractive.

Das: Given the weak supply overhang, I see a five-year cycle — with the beginning of end-user demand and later investors entering the fray.

Gumastha: We feel real estate will do well primarily because interest rates are low. When fixed income returns come down, Indians tend to allocate more towards real estate. On the commercial side, things are not exactly clear though a lot of money is flowing in from the likes of CDPQ and the Japanese. But given that employees are still working out of homes, the picture is not clear. But, one has to be cautious since real estate is a very illiquid asset class and there are concerns around the cash component coming back.

Shah: The big story for commercial real estate is that institutional funding will eventually lead to a clean-up of this sector. The story is in larger floor space getting rented out, with the likes of Google, Facebook, JPMorgan, and outsourcing and services industry seeking office spaces of half a million square feet. What’s big for the sector is the fractionalisation of ownership that is taking place. It’s a big tax arbitrage to own these listed units of REITs on exchanges, which is treated as equity tax after three years of holding. Depending on how it is structured, if it is majority owned by an India promoter, 92% of the rent income is distributed as a dividend, which is 100% tax free. Actually, that’s the only asset class after tax-free bonds where the dividend is 100% exempt for an HNI investor. So, incrementally, it will find a very large space in the portfolio for long-term investors. Now it looks like a value buy as NAVs are highly depressed. If a strong cycle comes back in the next couple of years and occupancy moves closer to 90%, a great revision will happen in these contracts. On the residential side as an investment theme, it is better to make money by buying stocks of good developers rather than buying a flat.

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