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Real estate looks increasingly like the best performing asset class

 

By Rohan Parikh 

 

The fundamentals for well priced real estate in Colombo has been strong for a while. In my previous article, I spoke of the fundamental factors that make apartments in Colombo a substantial investment. The low urban density that leads to long commutes, the lack of supply to meet the needs of the middle and upper classes, inflation-proof nature of the asset, and most critically, the low margins developers are operating on in Colombo which protects against risks.

 The stampede to purchase mid-priced and semi-luxury apartments in the post-pandemic world has only strengthened this argument further. Developers are experiencing record volumes of monthly bookings and sales after a fairly slow few quarters.

 Real estate purchasers are of two kinds – actual users (who intend to live there) and investors (looking for a reliable asset as a means of wealth and some return). The post-pandemic world has boosted both categories. 

 Actual users have learned through lockdown the importance of a safe and comfortable primary residence which has access to all the necessary amenities. This has resulted in a general uptick in urban real estate across the world. Investors too have returned to real estate as a safe haven in a time of fluctuations and spasms in all other asset classes. A global crisis definitely helps one appreciate the importance of tangible assets!

 

This movement can be broken into a few key components.   

First, the realisation that any form of public transport is a risk during a pandemic due to the high risk of transmission. Additionally, the increasing number of individuals choosing to drive has created unmanageable traffic making has location a priority. The closer one is to work, the lower the risk of transmission and the least time wasted staring at the back of the car in front of you. Thus, apartments within easy reach of the main commercial areas have seen a huge spike in interest by both actual users and investors.  

 Secondly, the tangible nature of apartments has made them attractive investments relative to stocks or bonds. As global markets are propped up by massive government spending, they seem to be destined for a fair amount of volatility given the uncertainty that will be experienced over the next few years, in the wake of the pandemic. 

The recession also exposed several companies, especially those with high debt. Several high profile bankruptcies have already created panic in the bond markets across the world. The situation will only worsen as more companies fail to keep their heads above water in a prolonged global recession. Thus intangible stocks and bonds seem risky for many investors, given the certainty of a real estate asset. 

 As we see from the above, in times of uncertainty, a tangible asset is in demand. Therefore we must explore the critical characteristics of real estate. An important factor is that Real Estate generally holds its value in a recession and at the minimum tracks inflation, thereby giving the investor reasonably good protection against risk. It is very rare in growing markets to see real estate fail to hold its value.  

 In Colombo where construction margins are thin, and prices are amongst South Asia’s lowest, there is very little chance of new projects coming in at lower prices. The economics make it impossible, thereby further ensuring price protection for the buyer and giving them the confidence that their purchase is coming at a good price. Given the volatility of foreign exchange rates versus the Rupee, such inflation tracking becomes all the more valuable.   

 One of the disadvantages of real estate is that it can be illiquid (it takes time and effort to sell it when funds are needed). It is thus important to consider this at the time of purchase and select real estate that is easier to monetise when required. In such a case, finished apartments are generally a better bet than bare land as they are easier to monetise by rent or sale, and also easier to protect from encroachment. A healthy secondary market and rental market for good apartment units exists and is relatively easy to tap into. 

 

Thus, the post-COVID world is increasingly looking like a renaissance for apartment buyers!

(The writer is the Managing Director of Iconic Developments and an alumni of the Wharton School of Business and INSEAD)

 

 

Summary

 

Real estate in Colombo is a prized purchase for a variety of reasons

– The low urban density that leads to long commutes

– The lack of supply to meet the needs of the middle and upper classes

– Inflation-proof nature of the asset

– the low margins developers are operating on in Colombo 

This has led to an increase in demand for mid-priced and semi-luxury apartments in the post-pandemic world.

Real estate purchasers are of two kinds – actual users (who intend to live there) and investors (looking for a reliable asset as a means of wealth and some return). Investors too have returned to real estate as a safe haven in a time of fluctuations and spasms in all other asset classes, making stocks and bonds seem risky for many investors. This is also because Real Estate generally holds its value in a recession and at the minimum tracks inflation, thereby giving the investor reasonably good protection against risk.

It is thus important to consider this at the time of purchase and select real estate that is easier to monetize when required.