This is the eternal question that real estate investors ask. ANAND KALYANARAMAN brings you some answers for these uncertain climes
Sellers not budging, buyers not biting — this standoff is the real story of real estate today. High realty prices have kept away many buyers, with prices soaring in most cities (see table Rising Rates). The RBI says transactions in the June quarter were 9.3 per cent higher than the same period last year but prices grew much faster, at 24.1 per cent. And, despite banks reducing rates and fees, loan disbursements in September have slowed.
Lenders attribute the slowdown to unaffordable realty prices. Homes within city areas are out of reach for most people, forcing them to look at suburbs and outskirts. Many buyers are waiting for builders to blink and reduce prices, while the latter sit on unsold inventory, seemingly in no rush to reverse or even slow the price juggernaut.
If you have the money to invest, is this the time to bet on real estate? The yea-sayers point to real estate’s superior returns over most other asset classes in the last few years (see table Realty Scores). They expect the good times to continue on the premise of finite supply amid growing demand. They say the builders’ formidable holding power will ensure that realty prices don’t dip. But the nay-sayers say that with supply increasing fast, the builders might buckle sooner or later and lower prices. They argue that given the weak economic and employment scenario, demand will translate into sales only if prices get affordable. Rates in Hyderabad, Kochi and Jaipur, for instance, are lower than five years ago.
Indian realty is characterised by city-specific idiosyncrasies. While Mumbai and Delhi are largely investor driven, Chennai is mostly end-user based. There is often staggering price variation among cities and within cities. Also, black money plays a big role, often upending conventional supply-demand logic. Given these dynamics, there cannot be a one-approach-suits-all theory to real estate investing and trying to predict price movements can be a mug’s game. For those who plan to or are already invested in real estate, here are some points to consider:
Scope for capital appreciation
First-time buyers cannot buy a house as investment since you might want to live there. For home-owners making a second investment, the important thing is to assess the potential for capital appreciation. Investing only for rental income is not a good idea. Rental yields — ratio of rent to value of property — are usually quite low. For instance, a 1,000 sq. ft residential apartment in T.Nagar, Chennai, today costs upwards of Rs.1 crore but will yield a monthly rent of about Rs. 25,000. At Rs. 2,40,000 to Rs. 3,60,000, the annual rent is only around 2.4-3.6 per cent of the capital cost, lower after taxes. Compare this to bank deposits at 9-10 per cent. Commercial properties may yield better but entail higher investments. Also, part of the rental income goes towards maintenance and taxes.
Realty investment is worthwhile only if it delivers a healthy increase in capital value, which compensates for higher risks and loan costs. Assess the city, the locality and the project that has the potential for this. Remember, there is no assurance that the recent high growth in prices will be repeated.
Houses in core areas that have already seen sharp appreciation may not be the best investment bet, simply because they are already saturated in terms of infrastructure and economic opportunities and there won’t be too many takers. Genuine end-users will prefer to rent economically than buy astronomically. Look for properties in the outskirts where employment and infrastructure development is picking up and rates are affordable. Such properties will appreciate more.
Investing in real estate needs the right mindset. Construction delays and declining prices can’t be ruled out, which can burn significant holes in your pocket. If you have taken a loan, the pain is magnified. Real estate is a fairly illiquid asset and increased supply will only add to the illiquidity risk. If you have deep pockets and don’t panic in a bear market, realty investment is for you. A good investment thumb-rule is whether you will be able to sell easily and for a good price.
Remember, the lower rates of pre-launch offers come with higher risks. The projects may not have necessary approvals, there could be completion delays, and you could be stuck for years before getting possession. Avoid pre-launch offers unless you have a high risk appetite.
Do your homework. Check title deeds, encumbrance certificates, approvals for purchase and construction, and the builder agreements on timelines and penalties. Engage a legal expert to check out the deal. Evaluate payment plans from builders — a flexible schedule can translate into substantial savings and better returns.
Don’t invest too much in real estate — this increases your concentration and liquidity risk. Invest across asset classes such as debt, equity, gold and real estate.
This improves your ability to withstand reversals and generates better returns overall.
Fix your optimal investment mix, based on age, net worth, return objectives, risk profile, and liquidity needs. Real estate investments are best made at a young age when you can take on higher risk and have a longer time horizon to ride out the market.
If you are taking a loan to finance your real estate investment, find out how much debt you can comfortably service, based on your present and projected income. A leveraged investment is a double-edged sword; both gains and losses are magnified. Don’t over-leverage; keep sufficient funds to meet contingencies.
Review your investment
Don’t assume that real estate prices will only go up. Even growth markets such as China have seen realty prices crash. It is important to regularly review your investment and take an objective call on whether to stay invested (if there is scope for appreciation) or sell (either because you have reached the targeted return or to cut losses). Don’t get emotionally attached to your real estate investments, they don’t love you back.