Real estate has given good returns over the years, though prices have risen at an uneven pace at times. When you invest in a built-up property
to earn regular income, there is no need to worry about exiting. But when your aim is capital gain, timing the sale is the key
to good returns. What's a good price appreciation after which you should sell your property
? Let's see what our experts have to say on this.INVESTMENT TENURE
Just before the global financial crisis of 2008, such was the pace of price rise that many people were making decent profit by holding properties for just a few months. That frenzied growth has now given way to much calmer markets.
Real estate should be looked at as a long-term investment. Most property consultants suggest a holding period of at least three years.
"It is advisable to hold residential or commercial property investments for at least three years. But the maximum return on investment is generated between five and seven years," says Raja Kaushal, managing director and country head, India, BNP Paribas Real Estate Advisory.
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Even in markets where there is heavy speculation, brokers advise a holding period of at least a year, even if you have bought with the sole aim of flipping.
"Short-term flipping can be done in only a few markets such as the Delhi-National Capital Region. There is no big drawback to it, except some risk. If the market sentiment changes, you may not be able to exit at the desired time," says Shveta Jain, director (residential services) with property consultancy Cushman & Wakefield India. Jain says a property should be held for at least three-five years.
THINGS TO DO WHILE INVESTING IN REALTY
- Decide investment horizon
- Include potential rental ncome during investment tenure
- Factor in transaction costs such as stamp duty and brokerage
- Analyse tax liabilities at the time of exit
- Check if renovating the property can fetch a higher price
- Consider infrastructure growth in the locality
- Look at supply of new properties in the area
- Check prices in nearby similar projects
Transaction costs and taxes also decide the tenure. This is because unless the property is in the developer's books (in underconstruction properties), you also have to pay stamp duty, brokerage and associated costs. A holding period of more than three years is also beneficial as the profit is then considered a long-term capital gain, which is taxed at 20 per cent after adjusting the purchase price against inflation. If you sell before three years, the profit is added to your income and taxed according to the applicable tax rate. Exiting before three years can be beneficial from the tax angle only if your total income does not exceed the lowest tax bracket.EXIT MOMENT
If your aim is capital gain, consultants suggest under-construction projects
, preferably purchased at the time of launch
"One can exit such investments when the project is nearing completion or is ready for possession. The ideal time to exit under-construction properties is one year before or after the possession," says Jain.
Long-term investors need to analyse market conditions on a regular basis. Factors that should trigger an exit include the local market becoming mature with limited growth prospects and the locality failing to develop according to expectations.
Trends in the local real estate market are also important. To arrive at the right price, look at similar assets in the area. In case of an under-construction project, look at properties with the same development time-frame. Infrastructure developments should also be considered to avoid exiting at the onset of a growth cycle. You should also be aware of the upcoming supply in the locality as availability of new properties will limit growth in value of your property.
Keeping track of price trends in the locality will also help you identify the right time to sell your asset. If prices have risen fast and there is limited scope for further growth, exiting will ensure that your capital does not remain idle and drag down the overall return.AVERAGE RETURN
Stock investors set a target for their picks. What is a good return from a property investment? Capital appreciation in real estate varies with the nature of the local market and the investment pattern.
"In a market driven by endusers, 15-18 per cent per annum is a good return. Such markets also see more stable growth. In speculative markets, fundamentals do not support prices," says Jain.
Property investments are riskier than fixed-income instruments. So, one needs a higher return to justify the risk.
"A property investment must fetch three-four percentage points more than fixed deposits or government securities," says Kaushal.
However, one cannot have a single yardstick to decide the exit price for a property investment.
"When an investor decides to exit, the price should be guided by open market valuation. It is neither professional nor advisable to wait until a dream figure based on opinions is reached," says Ramesh Nair, managing director (West), Jones Lang LaSalle India (JLL).CYCLICAL GROWTH
A property investment must fetch three-four percentage points more than fixed deposits or government bonds.
India Head, BNP Paribas Real Estate
The real estate market is cyclical, which means growth and declines follow each other. When the market is booming, it is easier to find a buyer who is optimistic about your property and is willing to pay a good price for it.
You must know how to handle the cyclical nature of the property market. Do not sell at the onset of a challenging environment, perceiving the real estate market to be riskier than it actually is. Similarly, you should not become too optimistic when the market is going through a prolonged phase of growth.
"The important factor is where the market stands. This is the most crucial aspect of timing a successful and profitable exit," says Nair of JLL. "All industries are cyclical in nature. As long as there are business and demographic cycles, there will be real estate cycles as well. The biggest profits are made when one buys (a property) when nobody wants it and sells when everybody wants it," he adds.