Make Rs 5 lakh grow to Rs 1 crore in four years —at an annual return of 111% and an absolute return of 1,900%! A few years ago nobody investing in real estate would have believed such a prophesy.
Yet, if you happened to buy a property in the top metros at the turn of this century, this is the kind of gain you have made. Ask Tarun Vashishtha, a Bangalore-based MNC executive, who has created wealth worth over Rs 1 crore since 2002 from real estate. Or bank executive Anuj Dobhal whose investment of Rs 27 lakh in a Noida flat has almost tripled in four years. The arithmetic is simple: A down payment of about Rs 5 lakh would have fetched a home loan of Rs 30 lakh—the price of a 3-bedroom house in most metro markets four years ago. Depending on the exact location of the house, its current value would be Rs 1 crore or higher.
Crorepati or not, in its scope, size and strength real estate has become an extraordinary wealth creation machine for all Indians. In the following pages we tell you how to make the most of this investment, whether you are a first time buyer of home or just an investor.
How real estate became a wealth machine
As a wealth creator in the past four years, real estate has beaten all forms of investment, and its own past record. The 3S’s that define the buildout boom are the scope, that is the number of people that have benefited from the boom; the size or the returns on investment have been highest ever; and strength—the property-to-prosperity-to-property cycle is stronger than ever.PROPERTY PROPELLERS |
| INCOME: The rich and upper middle-class has doubled in 5 years |
| DEMOGRAPHY: Rising working population means more homes |
| MOBILITY: People leaving family houses need new dwellings |
| INVESTMENT: Domestic builders are pouring money, FDI has come in |
| INTEREST RATE: A 50% cut helped people opt for EMI over rent |
| ACCESSIBILITY: Highways are turning townships on the way attractive |
Unlike earlier upswings when prices would generally shoot up only in select localities of a city, the current tide has lifted all places within cities. Prices of new localities in many places are as high as those of traditional posh areas. Suburbs have been the growth drivers in almost all metros, as well as in smaller towns. The message is simple—people want a good mix of life-after-work and life-at-work. That’s a fundamental requirement of a property boom fuelled by services companies and their knowledge workers.
Significantly, this is no more a metro-specific phenomenon. Smaller cities with five to 10 lakh population have also started seeing some big ticket investments, thanks to the IT and retail sector, both of which are very people-centric and aren’t likely to slow down any time soon. Suburbs have removed limits on a city’s expansion.
From Gurgaon, Noida and Faridabad, Delhi is now expanding to Manesar, Bhiwadi and Sonepat. Similarly, Kandivali in Mumbai or Whitefield in Bangalore, which were just small suburbs, have been the main drivers of growth in the city. IT and IT-enabled companies have been one of the main forces behind the new construction activity. On the demand side the two factors that contributed most in turning real estate into a wealth creating machine were rising income and easier and cheaper access to loans. Neither of the two factors are likely to reverse.
The NCAER income pyramid shows that the number of super rich, rich and upper middle-class families have more than doubled between 2001 and 2006. The rise in riches is expected to continue at a similar rate till 2010. The recent hike in interest rates have added to the anxiousness of the loan seekers. But with rates likely to stabilise and banks beginning to customise (often discounted) offers for individual borrowers, interest rates are unlikely to play a dampener. If there is something holding back demand in pockets of different cities it is the expectation of a price correction. Expecting a fall, some potential buyers are holding back purchase decisions, whereas people with two houses aren’t selling hoping for prices to rise. It’s this holding operation that has stabilised prices—at least momentarily— in certain pockets.
The spectacular and sustained returns have matured the property markets in another way. A larger number of people are buying real estate purely as investment (see Guest Column on page 32). The second home buyers have been an important factor in this growth who have kept the churning happening and on the back of which real estate has grown to this level. If Vashishtha has bought two flats and three plots in Bangalore since 2002, Gurgaon’s Atul Agarwal has plots and flats in Jaipur, Neemrana and Bhiwadi.
Where and how to invest
Real estate is emerging as a key component of financial portfolio. After the last property boom (1992-1996) prices had crashed by up to 50% in some markets. Experts believe such a crash—or even a major correction—isn’t likely any time soon for a combination of demand and supply reasons (see box Property Propellers).
Demand for residential property is still strong across the country and it will remain so for a few years. In fact some real estate players don’t see the current market as a bull run at all. “Prices were much lower than what they should have been since 1995-96 and have started picking up only after 2003. So while the rate of price appreciation may slow down, but prices will continue to rise,” says Pankaj Bajaj, managing director, Eldeco Infrastructure.FUTURE SCENARIO | ||
SHORT TERM | MEDIUM TERM | LONG TERM |
3 years | 7-10 years | 10+ years |
| Invest in non-metros for higher returns. Developers and retailers are building land banks in the prime areas of these cities. | All fundamentals point to a continued buoyancy in real estate prices, even as the rate of growth itself declines. | Real estate is likely to offer 12-15% annual returns in the long term.The sector is estimated to grow six times by 2015. |
Location, pricing and need are the three basic—and somewhat overlapping—factors in any home buying decision. Location preference is of course personal, if the purpose is to self occupy. Real estate for purely investment purposes can be less restricted by the preference of location.
Kolkata among the metro cities is most attractively priced with property prices the cheapest. And if you aren’t hung up on big cities, better bargains and returns can be found in smaller towns (see graphics Capital Gains and Regional Realities in the preceding pages).
Unlike other investments, you can enter the real estate market only with a large corpus. Though bank loans reduce the size of down payment, they impose a long term financial commitment. If you plan to invest for rental income, returns will be much lower than what the same amount of money could earn from other investment avenues.
The current average rent yield in metros is only about 6-7%. Of course, capital appreciation is the main reason for investment. Like most other investments, real estate is not for the short term. “Though in the past few years people have been booking property and exiting in six months at a huge premium, that is a high risk game. Don’t buy for short term if you don’t have money to lose,” suggests Anshuman Magazine, managing director, CB Richard Ellis. Heed this advice even more if you are purchasing your first house. A bad investment can lock you into losses for a long time. The basic rule is to buy cheap, sell at a profit—no matter how small the margin is.
Commercial property can also fetch good returns, sometimes with a smaller investment. But your need to know the market is even greater for such purchases. “Individual investors should not get into retail or office space unless they have a very good idea of the market,” says Ankur Srivastava, managing director, DTZ Debenham Tie Leung, a real estate consultancy. For instance, if you invest in a mall which has also been sold to 100 other investors, how well your property is maintained and run will critically depend on what the other occupants do with their property.
Land or apartment? Land is usually more liquid and allows you options of staggered construction— that is if you are buying it to build a house. Take precautions in verifying the property’s title which should be free of legal entanglements. It’s easier to get a loan for an apartment in approved projects than for land. But resale of a plot is easier because unlike a flat, it doesn’t become second hand. And of course, a corner plot is always premium.
What does the future hold
Real estate is a long term game—perhaps even longer than investing in stocks or mutual funds. Investment for less than one year is speculation and that for less than three years is considered short term. Here’s what the experts’ take on the future is:
Short term (three years): Prices will stabilise in metro markets, except in Kolkata where they will continue to rise. The number of buyers in these markets have come down because of an anticipated correction in prices. Non-metros will have a higher return potential because developers are building land banks in land banks in prime areas of these cities. “We are unlikely to experience the exorbitantly high levels of price rise as seen during the past two years,” says Bajaj. The waitand-watch period notwithstanding, the demand for housing is strong. The two factors to watch out for in the next year are government policy on foreign investment and SEZ.
Medium term (seven to 10 years): It isn’t easy to predict market trends but all the fundamental factors point to a continued buoyancy in real estate prices, even as the growth rate itself declines. But specific areas could have big corrections. “We expect a correction of about 10 to 15% in some overheated markets like Gurgaon in the medium term,” says Srivastava. The reasons: Investors who are now holding on to houses, expecting to sell at a peak, may start selling off at the sign of corrections. That is when there will be a big supply coming into the market, bringing down prices in some areas. The scope for price appreciation is higher in the Rs 15 to Rs 30 lakh residential segment because demand is driven by end-users.
Long term (over 10 years): A Merrill Lynch forecast says that Indian realty will rise by over six times between 2005 and 2015. Real estate is likely to offer 12-15% annual returns in the long term. The supply of housing is likely to rise by 3% a year—faster than witnessed in the past four decades. Apart from the quantity, big shifts will take place in the quality of housing demand and delivery.
What can lead to a crash: As long as India’s economic growth rate is high, a nation-wide crash in property prices can be ruled out. Yet concerns about a possible assetprice inflation has led the Reserve Bank of India to raise the risk weights on real estate loans that pushed up interest rates on home loans. A sharp rise in rates will surely bring the roof down on real estate market but the chances of this happening in the next couple of years are negligible. Small variations in interest rates will be borne by the banks and the borrowers by readjusting the repayment.
A sudden increase in new housing supply can cause stagnation, but experts don’t foresee supply excesses causing more than a temporary correction. Right now builders and house buyers enjoy liberal tax benefits. Withdrawal or cutting back of these benefits, another unlikely scenario, could hurt the market. And finally the mother of all dampeners—economic slowdown. A deceleration in economic and industrial growth will lead to sharp cuts in investment and income.
However, none of these downsides are likely to take affect in the foreseeable future. Real estate will most likely not create wealth at the rate it did in the past four years. But returns from investment will most likely be in double digits, if basic care is taken in choice of location.
