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Pain In Property Market, Gain In P2P Lending

Real estate is a dead investment.
Please don’t be shocked to read that.
No. one of the favoured asset classes of millions of Indians hasn’t turned junk overnight.
However, it’s surely losing its charm.

Let’s find out.
First off, you need to understand what drives the real estate prices up. Of course, rapid urbanisation is the single largest contributor to the upswing in the housing prices. Lakhs of people flock their way to cities in search of better job opportunities, pushing the demand for housing higher. Human aspirations are endless, aren’t they? Buying a bigger house is a well-nurtured dream of many.

These are the end-users of real estate, and they create the actual demand for properties.
And, those who earn good enough to buy a second home just for the sake of investment propel the demand for real estate even higher.

Now imagine…
In the absence of end users, meaning those who buy the properties for the purpose of dwelling, how the real estate market can sustain in the long run?

Investors are always in search of another investor whom they can sell their property. A few of them don’t have an objective of selling their property but are interested in earning rental income.
Here’s a problem.

Due to a long drawn out lull in the real estate markets, especially in metros and tier 1 cities, inventories with developers have been piling up. When there’s an ample supply of new units, there’s always pressure on investors. They find it difficult to sell off their units under such circumstances.

It’s an open secret that the prevalence of black money propelled the property boom. However, post demonetisation, cash-backed property transactions will become less attractive. It may hamper the growth of secondary market operations and in turn, will have an impact on primary market transactions as well.
Besides, after the establishment of real estate regulator and implementation of the Benami Transactions (Prohibition) Amendment Act, 2016, property markets are expected to become more transparent. Transparency may drag the real estate prices as utilizing the black money for real estate deals will become increasingly challenging and risky as well.

Things are likely to get even harder for those investing in second homes with borrowed money.
Typically a person buying a house as an investment purpose thinks—“my property will appreciate substantially by the time I pay off my home loan entirely.”

Let’s assume Rakesh Singh Saini decides to buy a second home for Rs 50 lakh. He secures a loan worth 80% of the value of the property which is Rs 40 lakh. The loan is to be repaid in next 20 years, and the EMI works out to be Rs 38,600. This implies that Mr Saini would pay Rs 4.63 lakh every year.

Terms of the Loan

Loan AmountRs.40Lakh
Tenure of Loan20 Years
Rate of Interest10%
EMIRs. 38,600
(For illustration purpose only)

If you noticed, Mr Saini would pay Rs 92.64 lakh over next 20 years as EMI. In other words, Rs 52.64 lakh is the interest amount that the bank will recover from him in toto. Now assume the property he bought for Rs 50 lakh will grow at 10% compounded annualised rate for 20 years and would become worth Rs 3.36 crore. Now if you deduct the total interest Mr Saini will pay on loan, the net returns would be Rs 2.84 crore.

Here’s the Smart Deal

Yearly investment in P2P LoansRs 4.63 lakh
Interest rate14% p.a.
Time horizon of your investments in P2P Loan projects20 years
Value of investments After 20 yearsRs 4.22 crore
(For illustration purpose only)

As against that if he prefers to invest money equivalent to his loan EMI in projects- a P2P Lending platform for 20 years, his investment would grow to massive Rs 4.22 crore. Here, the assumption is that he would invest at 14% interest rate. The only condition is that he will have to reinvest all his earnings again in P2P Lending projects at the same rate.

Icing on the Cake

Don’t forget Mr. Saini kept aside Rs 10 lakh which he intended to utilize for making a down payment.
If he invests even this amount in P2P Loans for 20 years at 14% compounded annualized rate and plows back the interest component all throughout, his corpus will grow to Rs 5.59 crore. (Rs 4.42 crore + Rs 1.37 crore.)

In other words, your investment in P2P lending projects can earn you 97% higher returns as compared to those fetched by your investment in real estate.

“P2P lending concept is a revolutionary change in terms of long-term investment as it offers maximum interest rates on investment,” says Raghvendra Pratap Singh – co-founder of the top P2P Lending platform in India,

Some of you may have a few questions…
How can we assume real estate sector to grow at just 10% compounded annualized rate for next 20 years?
Well, we didn’t mean, all real estate markets in the country will grow at that pace. True, there will be fast-growing pockets. But most of the metro and tier 1 cities where the real estate prices appear to be overheated at the moment, may witness a price stagnation. A decline in housing prices can’t be ruled out for a few years until they become affordable to the end-users.

As you may be aware, the Government has been trying to discourage the use of cash in high-value transactions. If you complete a transaction using cash worth Rs 3 lakh or more, you will have to pay a penalty of equal amount. Such stringent laws would discourage the property market which has been cash-dependent to a large extent.

Budget 2017-18 has introduced a new provision that caps the deduction for the interest paid on home loans at Rs 2 lakh p.a. if the house is rented. So far, there wasn’t any such cap. Many investors set off such interest payment against their income under other heads. Real estate demand from investors is like to suffer on this account.

Some of you may feel we didn’t factor in the rent one may earn if the house is let out. You are right, but you will also appreciate that we didn’t consider the maintenance cost and the depreciation of the property either. At a time when the property is in excess supply, rents are expected to become extremely competitive, and yields are likely to fall.

Important aspect that you might have missed here
We have assumed you will earn 14% returns on P2P Lending projects. At present, you can make as high as 28% interest depending on the risk category of the loan with But, we have been conservative in assumptions about the future interest rates and your risk appetite. If you earn over 14% on P2P Loan project, your investments will grow at a blistering pace.
You shouldn’t take the past performance of any asset class for granted. The real estate is no exception to this.

P2P Lending is an upcoming asset class which, so far, wasn’t available to Indian investors. As and when RBI rolls out regulations for the sector, P2P Lending industry may enter a rapid growth phase.
Don’t believe in unreal growth stories of real estate. Future looks grim.
In contrast, P2P Lending holds a lot of promise.

Emotional investors will still flock the tried and tested way of real estate while smart investors may water the right plant.