Introduction
With another financial year coming to an end, Indians have again begun to invest in real estate. And, the real estate in question this time is the luxury properties.
Let’s understand the meaning of ‘luxury properties’ in this context first.
Luxurious properties in the said context are those properties the ticket size of which ranges from ₹10 crore to more than ₹100 crore.
As you might have noticed by the ticket size, the demand and supply of these properties are inversely proportional. It might be one of the topmost reasons why the rich Indians are investing more in luxurious properties. The contributing factor to this is the fear of missing out on the limited supply of affluent properties.
Election is another reason for such investments. Investors who have previously benefited from the election-ruling financial market might be shifting their investments to real estate, seeking stability in the election-related market.
The Indian luxury real estate market has witnessed a surge in activity towards the end of the financial year (March 31st) in recent years. This trend is particularly evident among High
Net-worth Individuals (HNIs) and Ultra High Net-worth Individuals (UHNIs) who are increasingly closing deals for high-end properties before the year-end. The supply is less than the demand.
A recent survey reveals a surge in economic optimism among India’s wealthy. Nearly 80% of high-net-worth individuals (HNIs) and ultra-high-net-worth individuals (UHNIs) believe the Indian economy is on a positive path for 2023-24, a significant increase from 59% last year.
This 20-point jump reflects growing confidence in the country’s economic future among its affluent class.
Additionally, a striking 83% of affluent respondents reported owning multiple luxury properties beyond their primary residences. This highlights their strategic approach to real estate investment, with ownership of various assets including:
- Commercial real estate (34%)
- Holiday homes (25%)
- Agricultural land (21%)
- Farmhouses (20%)
This diversified portfolio approach suggests that affluent Indians are seeking not only status but also potential financial gain and varied lifestyle options through their property ownership.
Let’s delve deeper and explore the reasons behind this annual phenomenon.
1. Tax Planning Strategies:
⦿ Capital Gains Optimization:
HNIs often seek to invest their capital gains, generated from other assets like stocks or businesses, in a tax-efficient manner. Real estate provides an attractive option, as it allows for offsetting capital gains tax by reinvesting the gains in a new property within a specific timeframe. This “investment window” often coincides with the financial year’s end, leading to a last-minute rush to finalize deals.
⦿ Tax Deductions and Benefits:
Luxury properties, despite their hefty price tags, offer certain tax benefits. Depreciation on the property value can be claimed, translating to lower taxable income. Additionally, interest paid on home loans can be partially deducted, further reducing tax liabilities for these individuals.
2. Economic Optimism and Investment Diversification:
⦿ Confidence in the Indian Economy:
A positive outlook on the Indian economy, with its projected growth and anticipated appreciation in real estate value, fuels the decision to invest in luxury properties. HNIs view these properties as a safe and potentially lucrative long-term investment, offering a hedge against inflation and market volatility.
⦿ Portfolio Diversification:
For HNIs, luxury properties offer an opportunity to diversify their investment portfolios, spreading their risk across different asset classes. This mitigates potential losses in other sectors, creating a more balanced financial position.
3. Lifestyle Aspirations and Asset Appreciation:
⦿ Exclusive Living Experience:
Luxury properties cater to a specific segment that values exclusivity, high-end amenities, and a premium living experience. These properties often boast prime locations, world-class facilities, and unparalleled comfort, appealing to the aspirational desires of affluent buyers.
⦿ Anticipated Property Value Growth:
The luxury real estate market in India has shown consistent growth over the past few years. HNIs expect this trend to continue, making luxury properties a lucrative investment with the potential for substantial capital appreciation over the long term.
4. Psychological Factors and End-of-Year Triggers:
⦿ Decision-Making Bias:
Behavioral economics highlights the concept of “loss aversion,” where individuals are more sensitive to potential losses than potential gains. As the financial year nears its end, the fear of missing out on tax benefits or lucrative investment opportunities can trigger last-minute buying decisions.
⦿ Social Proof and Status Symbol:
In certain segments of society, owning a luxury property can be seen as a symbol of success and social status. The end of the financial year may act as a trigger for individuals seeking to showcase their achievements and solidify their social standing.
5. Market Dynamics and Developer Incentives:
⦿ Limited Supply and High Demand:
The supply of luxury properties in prime locations is often limited, creating a sense of exclusivity and high demand. This can lead to a situation where buyers perceive a need to act quickly to secure their desired property before it is sold out, further contributing to the end-of-year surge.
⦿ Developer Incentives and Offers:
To attract buyers during this period, developers may offer special discounts, payment plans, or additional benefits on luxury properties. These incentives can add an extra layer of motivation for HNIs to finalize deals before the offers expire at the end of the financial year.
But what are the driving forces behind this phenomenon?
To understand the reasons behind this trend, it’s crucial to consider the broader financial landscape in India:
⦿ Capital Gains:
The Indian stock market has witnessed significant growth in recent years, leading to potential capital gains for many investors. As the financial year comes to a close, individuals with large capital gains may seek to invest them in assets like luxury properties to offset their tax burden through avenues like Section 54EC. One such example is Section 54EC of the Income Tax Act, which allows individuals to claim a deduction of up to ₹1.5 lacs on capital gains earned from the sale of capital assets like stocks or mutual funds if they reinvest the proceeds in residential property within a stipulated timeframe. This deduction effectively reduces their taxable income and tax liability. This presents a compelling incentive for HNIs who may have accrued significant gains in the stock market or other investments throughout the year. By strategically investing these gains in luxury properties before the financial year concludes, they can potentially defer or minimize their tax liabilities.
Data Point:
According to a report by Knight Frank, the average price of luxury properties in India’s major cities witnessed a rise of 15-20% between 2021 and 2023. This growth, coupled with the potential tax benefits, can make pre-year-end purchases in the luxury segment particularly attractive for savvy investors seeking to optimize their wealth management strategies.
⦿ Portfolio Diversification and Inflation Hedging:
In today’s dynamic economic climate, characterized by rising inflation and market volatility, HNIs are increasingly seeking to diversify their investment portfolios to mitigate risk and ensure long-term financial stability. Real estate, particularly the luxury segment, is often perceived as a haven asset, offering both potential for capital appreciation and rental income generation. This makes it a valuable addition to a diversified portfolio, providing a hedge against inflation that can erode the value of other asset classes over time.
Data Point:
A survey conducted by Financial Express revealed that 71% of UHNIs and HNIs in India plan to invest in luxury real estate within the next 24 months, highlighting the growing appeal of this asset class as a diversification strategy.
⦿ Investment Potential and Long-Term Growth:
The Indian luxury real estate market has exhibited consistent growth over the past decade. Driven by factors such as urbanization, rising disposable income among affluent individuals, and a limited supply of premium properties, the demand for luxury residences remains strong. This, coupled with the inherent value appreciation associated with prime locations and high-quality construction, makes luxury properties an attractive investment proposition for HNIs seeking long-term wealth creation.
Data Point:
An analysis by JLL, indicates that the price of luxury properties in India’s key cities is projected to increase by 8-10% in the next two years, further solidifying the long-term investment potential of this segment.
⦿ Other Contributing Factors:
1. Limited Supply:
The supply of new luxury properties in major Indian cities remains limited, creating a sense of scarcity and driving up demand. This limited supply, coupled with rising demand, further incentivizes HNIs to close deals before the year-end to secure their preferred properties.
2. Low Interest Rates:
While interest rates have risen slightly in recent months, they remain historically low compared to previous years. This makes it more financially attractive for HNIs to take out mortgages to finance their luxury property purchases.
⦿ Considerations for Future Trends:
1. Market Correction Potential:
While the current trend of pre-year-end luxury property purchases is expected to continue shortly, it’s important to acknowledge the potential for market corrections. The global economic climate and domestic policy changes can affect the real estate market, and investors should consider seeking professional advice before making significant investment decisions.
2. Evolving Preferences:
The preferences of HNIs regarding luxury property features and locations are constantly evolving. Understanding these evolving preferences and choosing properties with long-term appeal is crucial for maximizing investment returns.
What has been the driving motive for luxury property investments?
A significant wave of investment in luxury real estate is sweeping through India, with 71% of affluent individuals expressing their desire to purchase property within the next two years. This surge is driven by several key factors, marking a shift in the market dynamics:
Capital Appreciation as the Prime Motivator:
- Investors are primarily focused on capital appreciation, which signifies the increase in a property’s value over time. This prioritizes long-term wealth creation over immediate lifestyle upgrades.
- This shift highlights the return of investor confidence in the Indian real estate market, signifying their belief in its potential for growth.
Increased Demand for Luxury and Ultra-Luxury Homes:
- There’s a notable rise in demand for luxury and ultra-luxury properties. This can be attributed to:
- Limited supply: The scarcity of new luxury housing projects creates exclusivity and drives up demand.
- Fear of missing out (FOMO): Affluent individuals are concerned about losing out on the most desirable properties, further fueling their desire to invest.
Insights from Real Estate Experts:
- Real estate experts point to the limited number of new launches in the luxury segment as a key factor contributing to the surge in demand. This creates an environment where competition for desirable properties is high.
- The FOMO phenomenon is also highlighted by experts as playing a crucial role in driving investment decisions. The desire to secure exclusive properties before they become unavailable is influencing purchasing behaviors.
⦿ Investment focus:
Capital appreciation is now the primary driver for 44% of wealthy individuals seeking to buy luxury properties in the next 24 months. This signifies a return of investors to the market, compared to the previous year, where:
- 35% were motivated by lifestyle upgrades.
- 20% sought income generation through property ownership.
⦿ Diversified portfolio:
The survey also highlights the diversified nature of real estate investments among wealthy Indians:
- 83% own multiple luxury properties beyond their primary residence.
- 34% invest in commercial real estate.
- 25% own holiday homes for leisure purposes.
- 21% hold agricultural land, potentially for investment or personal use.
- 20% own farmhouses, suggesting an interest in rural retreats.
⦿ Domestic vs. International investment:
- 35% of potential buyers expressed a preference for properties in Goa, indicating a strong domestic focus.
- 12% remain interested in overseas property, with Dubai, UAE and the United States retaining their top positions.
As stated by Abhishek Kiran Gupta, CEO and co-founder, of CRE Matrix and IndexTap.com, “Indians are getting richer every year and they are not shying away from flaunting their wealth. High-end homes and high-end cars are the most sought-after assets to show off one’s wealth. Also, the equities market has seen unprecedented gains in the last three years (post-COVID-19) and high-networth individuals are looking at profiting from equities and diversifying into real estate. We will see this trend continue as South Bombay (SOBO) shall be back in action for housing and retail with the completion of Atal Setu and near completion of the coastal road.“
The Bottom Line
The examples provided highlight the scale and diversity of luxury property investments by HNIs in India. From oceanfront apartments in Mumbai to spacious penthouses in Gurugram, these investments showcase the growing appeal of luxury living and the potential for substantial capital appreciation in this market segment.
The pre-financial year surge in luxury property purchases by wealthy individuals in India is a combination of various factors. While tax optimization strategies play a role, a broader shift towards economic optimism, investment diversification, and evolving preferences for spacious living and secure communities also contribute to this trend. Data suggests that the demand for luxury real estate in India is likely to remain strong, making it a valuable asset class for strategic investors seeking a combination of lifestyle amenities and potential for long-term capital appreciation.
In conclusion, the pre-year-end surge in luxury property purchases in India represents a confluence of economic, strategic, and lifestyle factors. Understanding these drivers and staying informed about future trends will be crucial for investors seeking to capitalize on the opportunities presented by this dynamic market.
