New concepts in real estate are catching on, with return on investment being much easier. A look at one such investment option
Buying a property in India has been an investment, quite lucrative since ages. Since it meets most of the ideal tenets of investment such as safety, returns,liquidity, asset appreciation,and tax savings, real estate is considered an attractive asset passed on through generations.
Land is not created anymore and therefore is an asset with in-built capital appreciation over the years and the built-up property also offers periodical returns by way of lease rentals.
Historically the returns from real estate investment in India have been superior as compared to other investment options and the returns could be in the range of 15-20 per cent per annum, over medium / long-term periods. Due to these reasons, a larger percentage of property purchases is done for the purpose of investment, rather for self-stay.
The liquidity i.e. time taken to liquidate the asset (selling the asset and realising the returns) in real estate is considered medium, as compared to other investments. It takes anywhere between three and six months to do so and get back the invested amount along with profit. Nowadays one can also get ‘loan against property' without liquidating the asset.
If a loan is obtained to purchase / construct / renovate a house property, the borrower can claim tax deductions on the principal loan repaid and interest charged on the loan amount, with certain conditions. On commercial property, the interest paid on the loan is set-off as expenditure from the rental income.
Note the drawbacks
The negative aspects about investing in real estate that need to be looked into are:
a) large ticket size of investment is required to own real estate assets, as property costs are always prohibitive
b) property costing less (less than Rs. 30 lakh in metro cities such as Bangalore) probably have mediocre design and construction quality, poor infrastructure and unpleasant surroundings
c) property dealings are complex in nature, with legal and technical verifications. It is almost impossible for a buyer to independently verify details with authorities
d) fabricated documents make it difficult to ascertain genuineness of title
e) life-time savings are to be pooled along with creating long-term debts
f) getting a property loan involves cumbersome procedures
g) many builders indulge in unethical business practices; cash dealings are encouraged by developers, leading to fear of losing advances paid by buyers
h) uncertainty of property registration and getting possession of the asset, while investing in on-going construction projects
i) before enjoying the asset, interest on the loan has to be paid on monthly basis, if loan is taken to acquire the asset
j) real estate agents are mostly uneducated and unprofessional, working with the sole intent of making their commissions.
k) home loan lenders, their agents and associates who are supposed to verify legal and technical soundness of property are sometimes found to be corrupt and hand-in-glove with panel advocates and engineers in funding unsound property
l) after acquiring the property, dealing with maintenance issues, tax payments is also a problem, if it is not for self-use
m) renting out a property, dealing with brokers, and collecting rent are cumbersome and facing problems with tenants is common
n) in case of open land parcel or sites, encroachment by neighbours and other elements is a big problem.
And if the plot is situated outside of the owner's residing place, it would be almost impossible to resolve the problem.
Due to these drawbacks, investors are often discouraged to invest in property and divert their attention to other investment options.
However, recently there are attempts being made by genuine professionals in the field of property development to tackle the above-mentioned disadvantages by offering new models, wherein the idea is to retain the inherent advantages of investment in real estate and at the same time, minimise the drawbacks.
One such concept recently introduced in Bangalore deserves attention, the salient features of which are as follows:
The investor needs to invest around Rs. 10 lakh to own a self-contained, fully furnished studio apartment in an IT (Information Technology) hub. The complex consists of 700+ fully furnished studio apartments, fitted with LCD TV, Wi-fi connectivity, kitchenette with microwave oven & refrigerator. The complex offers amenities such as cafeteria, clubhouse, ATMs, etc.
The complex is surrounded by leading IT companies and MNCs, where more than 1,50,000 professionals are employed. The entire complex is designed for long-stay accommodation for IT professionals at a very affordable cost, almost the same as they incur for a shabby paying guest accommodation.
The complex will be managed by a professional company with 24 x 7 services available. Rent will be collected from more than 1,400 occupants, pooled and after deducting maintenance charges, will be credited to the investor's account on quarterly basis.
This means that even if an investor's apartment is vacant, he will still earn his rentals by virtue of the ‘pooled' model.
The rent collected will be Rs. 10,000 pm per apartment and even with 80 per cent occupancy, the investor may get Rs. 6,000 rental return every month, which may increase by at least five per cent every year.
The investor need not pay any maintenance charges and can stay in the complex for one month in a year, free of cost, subject to availability. As owner of the apartment (freehold property), the investor is free to sell/gift/transfer the property anytime. The capital appreciation could be 10-15 per cent p.a. over medium / long term period.
This kind of investment should suit all kinds of people — salaried employees, businessmen or retired professionals who want safety of their money backed by immovable asset, capital appreciation and effort-free regular earnings which can be used as annuities (pension) or for any other periodical needs.
Free stay option
This kind of investment also suits outside investors (people staying out of Bangalore) and NRIs, as the property will be managed by a professional company. During their visits to Bangalore, such investors can also utilise the free stay option in the complex, thus save on expensive lodging charges.
Since the project is undertaken by a professional team and title to the property is verified by legal and technical experts, and all approvals obtained from government authorities, it has already attracted good attention from local investors and NRIs.
This novel concept could well be an attractive alternative for people looking for zero-hassle investment in real estate and may prove to be a successful model in the future.
(The author is a Director of Institute of Home Finance and can be contacted at email@example.com)