As the rupee continues to fall, what is the impact on the real estate industry? How will it impact project costs and rental values? Also, is this the right time to invest in a property now? Let’s take a look.
Before we begin, let’s take a look at what are the differences in an economy during rupee value depreciation and rupee values appreciation.
What does it mean?
|Rise in the value of domestic currency, compared to foreign currency||Fall in the value of domestic currency, compared to foreign currency|
Effect on Imports/Exports
|In foreign countries, the price falls for domestic goods and commodities. So, it leads to increase in exports||In domestic country, the price falls for foreign goods and commodities. So, it leads to increase in imports|
|Effect on Wages||Causes wages to increase because of overall economic well-being||Causes wages to fall because of stagnant economic growth|
Effect on Interest Rates
|Governments might reduce interest rates to boost the demand for products and services.||Government tends to increase interest rates to reduce the negative impact on the economy|
In a nutshell, strong currency rates generally mean a strong economy. Rate fluctuations, especially a downward spiral, can affect businesses, industries, and can challenge the core of a nation’s progress index. The same holds true for real estate.
From procurement of raw materials to daily wages, logistics costs and various construction costs/services, low rupee value can escalate budgets and cause unexpected delays. In terms of property costs and rental values, we can identify four sub-areas which will tell you how the rupee worth can impact your decision-making in real estate.
- Rupee and the developer
When the rupee value falls, it inversely impacts the cost of raw materials and services, transportation, and other expenses involved in construction – increasing the overall budget of a project by many times. There is also CRR (Cash Reserve Ratio) by the Reserve Bank of India (RBI) to battle, because any changes in CRR negatively impacts the lending rate of banks. This will lead to developers looking to pass the increased costs to the buyers, or delaying or abandoning projects.
Tip: Avoid picking up under construction properties when the rupee is in a downward spiral.
- Rupee and the buyer
A normal individual dreams of buying a property largely through his/her savings. As inflation shoots up, the day-to-day life will involve a lot more expenditure because household commodities will demand a lions share of the income forcing them to borrow more for buying a property. At the same time, rupee depreciation can also hike interest rates, resulting in an overall higher outflow for the property buyer.
Tip: Take these steps to minimise interest outflow in a high interest rate environment.
- Rupee and rental property
A declining currency rate can result in short supply as foreign investors lap up available properties. A shortage of homes available for rent then boosts up rental income as renters are forced to pay a premium for housing of their choice.
Tip: Depreciating rupee trend is a good time to put that second home on rent.
- Rupee and investing
While it’s not the best time for native stakeholders, depreciating rupee opens up a bag of opportunities for NRIs. More bang for their buck encourages them to invest back home at lower costs. For instance, a 10 per cent depreciation in rupee value allows NRIs to buy at a 10 per cent discount compared to Indian residents.
Looking at real estate as an investment, it’s important to listen to the pulse of the market to ensure you gain significant returns even when the economy is going through a bumpy ride.
Tip: Some ways in which investors can reduce the impact of a depreciating rupee:
- Think long-term
- Look for rental income prospects
- Choose commercial property over residential
- Opt for ready-to-move-in property vs. under construction projects