Speculation is highly risky, but it's one reason behind the exciting returns generated by real estate
in locations such as the Delhi-National Capital Region (NCR) and Mumbai in the last couple of years.
"Most residential markets, those driven by end-users as well as investors, have given good returns. In the current volatile environment, the situation changes fast," says Neeraj Bansal, director, risk consulting, KPMG India.
There are concerns if a fast price rise of homes is sustainable. Many investors would like to stay away from high-risk zones. What if you could buy a house
without worrying about prices going bust?RISK FACTORS
In open markets, demand and supply decide prices. But residential property prices
have been defying this basic principle. In many markets, the number of buyers is down but prices are not cooling off. Recently, the finance minister also asked builders to reduce prices.
are facing fund crunch. According to reports, the Reserve Bank of India has refused to allow banks to restructure loans to real estate companies without provisioning for potential losses in case of defaults. Restructuring would have allowed the builders to repay on fresh terms and conditions. Now, facing funding pressure, they may have to sell inventory at lower prices.
Investors flipping homes for quick gains pose the risk of creating a bubble if there are not enough actual users
"If there is loan restructuring or increase in liquidity, a price correction is unlikely, but if capital availability becomes difficult, developers may have to cut prices to push sales," says Pankaj Kapoor, owner and managing director, Liases Foras, a real estate rating and research firm.
The latter will hurt investor sentiment in markets where there is heavy speculative activity. Unlike the stock market, where buying quality shares on dips is recommended, real estate investors
don't have the option of averaging-buying more when the market falls to bring down the average purchase price. Developers may find themselves in a further tight spot if investors looking to benefit from price appreciation flee the market.
Under such circumstances, it is important to know the composition of buyers. Investing in areas where buyers are searching for homes rather than investment avenues can insulate you from any sharp price fall.LOCATION DYNAMICS
Not all property markets have investors trolling upcoming locations in search of a quick profit. In several cities, most buyers are looking for a place to live.
"End-user-driven markets are primarily in the southern region. It is estimated that around 80 per cent demand for residential housing in cities such as Bangalore, Chennai and Hyderabad is from end-users. Northern (Delhi-NCR) and western (Mumbai) regions are primarily investor-driven," says Bansal of KPMG India.
"Significant inflow of workers in South Indian cities, driven by growth in the information technology sector, is supporting the demand for residential units there," he says.
Some analysts also include Kolkata, Indore and Ahmedabad in the list of places where there is more demand from end-users.
"Some Tier-II cities such as Jaipur, Pune and Lucknow are also being preferred by end-users due to good availability of residential options in both affordable and middle segments," says Anshuman Magazine, chairman and managing director, CBRE South Asia, a property consultancy.
In speculative markets such as the NCR, hundreds of projects are coming up in far-flung locations without adequate infrastructure, with developers marketing these as future residential hubs and possible multi-baggers.USER ADVANTAGES
Prices in markets where end users are the primary buyers are more realistic. In contrast, there is little link between prices and fundamentals in speculative markets such as the NCR.
"Whether bought by an enduser or an investor, the product is the same. The only difference is that investors enter a project early to gain from price appreciation," says Chintan Patel, director, real estate and hospitality, Ernst and Young (E&Y) India.
Around 80% demand for homes in cities such as Bangalore, Chennai and Hyderabad is from end-users.
Director, Risk Consulting, KPMG India
According to real estate analysts, 80-90 per cent inventory in Delhi-NCR under-construction projects has been bought by speculators. When units in new projects are sold to investors, these generally change hands multiple times during the construction period, which is generally three-four years. Such heavy churning means fast rise in prices. Also, builders who market their projects as an investment increase list prices frequently to keep existing investors happy with notional gains.
But things are changing. "To check heavy churning, a lot of developers have started including a minimum holding period or payment criteria in agreements with buyers. They have also started charging for transfer of under-construction properties," says Patel.
However, not all investors are speculators threatening the equilibrium. There are two types of property investors-first, people buying their second or third home, and second, those looking to flip properties after holding them for a short period.
"Individuals buying an additional home will be more careful and look for investment quality. Even an investor with a horizon of five-plus years will be more careful. But investors looking to churn are like traders for whom homes are just another commodity to buy and sell for a profit," says Patel.RIGHT BUYS
If you want to earn steady income from a house, you should head to markets where end-users dominate. Here, prices will not rise at an obscene rate but you can expect steady appreciation. Such markets are also less prone to delivery delays.
Identifying an end-user-driven market is not difficult. Just find out how many units have been sold in new residential projects during a certain period.
"One of the factors which one should look at is the absorption level of new launches. An end-user-driven market will be less volatile. In the current economic slowdown, residential housing markets of cities such as Bangalore and Chennai are firm with a marginal drop in absorption compared to last year. However, absorption of new launches in Delhi-NCR and Mumbai has fallen significantly over the last one year," says Bansal of KPMG.
Investors looking to churn are like traders for whom homes are just another commodity to buy and sell for a profit.
Director, Real Estate, E&Y India
Rental yield can also be used to filter out speculative destinations. "In the domestic market, the annual rental yield from residential properties is 3-4 per cent of the property's value. In contrast, the yield abroad is 5-7 per cent. There is a difference in interest rates on debt as well," says Patel of E&Y. Loans are cheaper in countries such as the US and the UK.
"In India, people are willing to buy homes and give them on rent as price appreciation makes up for low rentals as well as high interest rates," says Patel.
In a speculative market, the end-user interest is low, resulting in apartments lying vacant or yielding low rental income. A high rental yield means the market is driven by end-users. Markets with high investor activity do not have good rental yields.
"Generally, Tier-I cities have strong fundamentals to support price appreciation. So, the right investment locations will be good Tier-I centres or cities with a lot of employment opportunities," says Patel.
Prices in the city have been rising consistently since 2007, according to the National Housing Bank's Residex, a residential property price index.
The market is primarily driven by end-users with low demand from investors as most of their funds are blocked in existing projects, says Pankaj Kapoor, managing director, Liases Foras, a real estate research firm.
Around half the housing demand is in five pockets-Vastral, Gandhinagar, Narol, Nikol and Naroda-due to better infrastructure there. The Zone 4 area has good connectivity due to Ring Road and Expressway.
There is a proposal for metro rail connecting the city with Gandhinagar. It will create a link between eastern and western Ahmedabad and the Ahmedabad international airport.
Property prices in Hyderabad have remained muted for quite some time due to political turmoil in the region. The market is expected to get a boost once the turmoil settles.
Apart from emerging as an information technology (IT) hub with the HITEC City township, a proposal to set up a 5,000-acre IT investment region near Hyderabad has been approved by the Central government. Analysts expect it to generate direct employment for 3-15 lakh people.
The city is expected to have its own metro rail in a year or so, with work on the first phase of the intra-city rail transit already in progress.
Gachibowli, Kondhapur, Madhapur, Kukutpally and Manikonda in the north-west region are part of the real estate corridor, accounting for 70% sales.
Due to its broad-based economy, the city is expected to see robust demand for houses whenever growth regains momentum.
The local economy is being strengthened by expansion of services and manufacturing sectors. The city has two ports and a large trading and scientific community. Proposed and under-construction infrastructure projects include a new international airport in Sriperumbudur, a multimodal logistics hub in Oragadam and the Chennai-Bangalore industrial rail corridor.
The south zone, particularly OMR and GST Road, is likely to see the most activity, primarily due to demand from those working in IT and manufacturing facilities there and in the vicinity.
In the west, Mt Poonamallee Road and Porur are witnessing extensive residential development.