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Time for fresh guard
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After four years of boom time, the property market is showing signs of stagnation. Time for investors to review their real estate investment strategy, says SRIKALA BHASHYAM
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In the last few quarters, there has been increasing dilemma among property investors as to whether they should go in for fresh investments or wait for the property prices to come down further. The desire to make fresh investments is generally driven by the moderate fall in certain segments of property prices coupled with the stability in interest rates. Though there has been extensive debate on the future course of interest rate movement, one thing is certain – inter
est rates are unlikely to move up further . In this background, the decision to invest in a property largely depends on the needs of the investors. For instance, if an individual is looking at investing in a property for investment purposes, this may not be the right season due to the following factors:
Low rental yield
The yield from rentals are always low in the short term and with prices having galloped in the last four years, the yield has come down drastically in the last few quarters. If you are looking at investing in a property with an eye on rental income, this may not be the right time as there has been a feeling of excess on the supply side and hence rental yield is unlikely to move up sharply in the short term. On the other hand, those who have the liquidity to invest in commercial property may still go ahead and do some shopping as there are no clear signs of pressure on the commercial property side. However, the same can’t be said on avenues of property income such as service apartments which could face more heat in the coming days. There is an element of excess supply even in this segment and more importantly, the hospitality industry itself has been lowering its rack rates in the last few weeks. This would put further pressure on service apartments to lower their prices. Hence, for fresh investors, looking at converting their residential property into service apartment, this may not be the right time.
IT not the sole driver
Time has come to take a fresh view on property investment. When tax sops were introduced for home loans, the scenario was completely different as investors could by property for a price of Rs.10-20 lakhs. As a result, a tax benefit of Rs.1.5 lakh on interest income made a huge difference to the investors. Today, with property prices having shot up to Rs.40-50 lakhs (for 2 bed-room flat in metros), the benefit from home loan is negligible in the light of huge home loans. So, an investor who looks at investing in a property with an eye on tax benefit from home loan has to prepare for a huge cash outflow which may prove meaningless in the long term. With property prices too expected to stabilize in the next couple of years, the benefits of capital appreciation too are muted. As a result, avoid investing in property for tax benefit.
It is not just the property price which has gone up in the last four years. A number of other costs relating to property too have gone up during the period. Take the case of maintenance costs of property. Whether it is monthly charges or annual charges, there has been a sharp rise in maintenance deposit/charges collected by builder for the property and often, investors fail to take into account these costs.
On the home loan front too, there has been a steady increase in related expenses such as administrative and processing charges for home loans. At present, not many banks are doling out loans without these charges which was not the case earlier. In addition, home loans are being packaged with other products such as insurance (in the form of cover for home loan liability) which further pushes up the cash flow for the borrower.
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Property Plus
Bangalore
Chennai
Hyderabad
Kochi
Malabar
Thiruvananthapuram
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