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 machineAs 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.
|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.