The real estate saga of confusion continues. Should you buy a house or wait till interest rates dip? Will the house you invested in two years ago get a better price in the coming months or do you cash out now? Is it smart to pre-pay the home loan? While answers to these questions remain elusive, some new ones have cropped up. Should you sell your home whose value may have peaked and relocate? Should you cash in on the mall mania by plunging into commercial property?
One would expect the foggy property mart to keep away all—sellers, buyers or borrowers, let alone evolve newer dilemmas. But it has. That’s real estate for you. As someone owning a house, paying rent, investing in a suburban cottage or finishing off the last of the EMIs, you just can’t bypass it.
It is difficult not to be caught in the uncertainty. Market vibes are conflicting and there is no one investment rule that answers all the above questions. In the past, MONEY TODAY attempted to peek into the future and suggest ways out of the confusion. Markets have changed since and new needs, investor types and issues have emerged. But uncertainty does not mean inaction. Hence these eight rules.
In this market too there are new deals to be made; just as there are ways of fixing an old deal. Mind you, despite a 2.5 percentage point hike in home loan rates and highest ever increase in housing prices in the past three years, the number of home loan takers is still rising—though at a slower rate. Why? Because income, opportunity and the need to buy a house continue to grow faster than costs. You too can make hay if you know how to make the sun shine. Turn over to mix and match the rules to suit your needs.
RULE I: Wait may be worthwhile, but it isn't a must
Because in real estate even short term is three years, medium term 7-10 years. Spotted a deal? Buy it, no matter the interest or price movements.
You hear that interest rates are peaking and may fall soon, and that property prices won’t appreciate as much now as they did in the past 2-3 years. You put two and two together to conclude that you mustn’t buy a house now. And if buyers are to hold on, so will have to sellers.
Betting on a good deal in future is a good strategy, but not when you already have a good option at hand. If interest rates fall, benefits will be passed on to you through floating rates—just as rate hikes have been thrust upon you in the past one year.
As for property prices, exceptions apart, good quality real estate isn’t going to fall. Surely not much and not for long. If you are buying for self use, you are invest -ing for at least 5-10 years. Unless you are exceptionally unlucky, you won’t be a loser in this time frame.
In fact you will surely be a gainer— the degree of which can vary. In the past four years, the realty market has created millions of crorepatis. Houses sold for Rs 20-25 lakh about four years ago now command a price of Rs 80-90 lakh.
Like in any asset, in real estate too past performance is no assurance of future returns. From now on, the returns from property are expected to be more muted (see table). But returns will be there.
“If you invest in good properties for the long term, you can ride over any market dips,” says Anshuman Magazine, MD of CB Richard Ellis. A five-year cycle should be the minimum investment time for real estate. Double the time period and returns could be higher.
RULE II: Be a pretend buyer
While you wait for the market to stabilise, start saving systematically so that you have a sizeable corpus when you do decide to make your move.
High property prices, rising interest rates and talk of a possible correction in property prices are keeping many aspiring home owners from buying their dream house.
If you belong to this growing tribe, here’s something you can do while you wait for the market to correct and interest rates to recede. Imagine you have already bought a house with a home loan and start paying the EMI—to yourself.
Depending on your risk appetite, invest an amount equal to the EMI every month in a recurring deposit or a mutual fund scheme through a systematic investment plan (SIP).
The money thus saved will add to a sizeable corpus by the time you are ready to buy the house. It could be used for the down payment on the house or for other related expenses such as registration and transfer charges.
Suppose you had planned to take a Rs 20-lakh loan for 10 years. At 11% interest, the EMI works out to Rs 27,550. Invested every month in a fixed deposit or a mutual fund MIP that earns 10%, this would grow to Rs 3.45 lakh by the end of the first year.
If you are not in a particular hurry and invest the amount in a balanced or equity fund that earns 15%, the corpus would grow to Rs 7.58 lakh at the end of two years.
The higher down payment, the lower the interest outgo. Also, if you have a sizeable corpus, it opens the doors of the resale market to you. Of course, this works best if you are very young and can afford to wait for up to 10 years before you buy a house. If a 25-year-old starts saving Rs 10,000 a month in an equity fund that earns 15% annually, he would have saved Rs 26 lakh by the time he is ready to buy a house at the age of 35. As they say, well begun is half done.
RULE III: Play safe with blue-chip locations
Follow the footsteps of IT companies or map out upcoming infrastructure projects—and you may have spotted a deal.
When the rising tide of property prices subsides, location becomes the key distinguisher between a good and not-so-good real estate deal.
Such a time is now upon us. Locations keep changing their value over time and keeping a tab on that could land you a good property. Upcoming infrastructure projects are pointers to a golden future.
These include metro rail (being planned in several cities), airports, highways or even events like the Commonwealth Games. Luckily, a lot is happening on these fronts across India.
Following in the footsteps of IT companies is one sure shot strategy. “Realty demand is influenced greatly by the IT/ITeS industry’s preferences. Following IT companies is a great strategy,” says Sudhir Nair, head of research, Crisil Research & Information Services.
On the other hand, some exceptional development can turn a prime location into an investor’s nightmare. The sealing drive against residential properties used for commercial activities in Delhi and a few other cities has brought down prices in such areas by almost 20-25% since January 2006.
Large integrated townships are also safe bets in a falling market. They create their own demand, attracting house owners with offices, commercial complexes and well-planned amenities.
RULE IV: Be a move-up buyer
Though not always easy, booking profits on your house is a greater possibility today than ever before.
Granted a house is not like a stock or mutual fund that you can get in and out of every time there is an opportunity to make a killing (profit booking), but time has come to at least be aware of the possibility.
The option of what experts call “unlocking the value of your existing house” is more real today than ever before (see Sheetal Verma case study).
The financial argument is simple. Anybody who bought a house about three years ago must be sitting on at least 100-200% value appreciation (profits) today.
Even older houses, built decades ago, have appreciated hugely in value. If lifestyle or job is not a constraint, these house owners can sell their property and move to a newer, better location—if not also a bigger house.
The price of the old house will either fund the whole or a major portion of the new purchase. There is always a home loan to take care of the remaining portion. Of course, the usual due diligence of choosing a good house and the right location will be critical to ensure that the new house is indeed a better deal— financially and convenience-wise.
Often, suburbs offer you a bigger residence in a better planned neighbourhood compared to the cramped house in a busier part of the city. They are usually cheaper. A major bonus of selling an old property and buying a new one is that it gives you access to the more stable resale market. Sometimes selling a part of the property (a floor) can give you enough money to look for a better house while you retain the rest of the house. Keep in mind that entry and exit costs are high in the property market. You end up paying registration charges and stamp duty all over again. Also, if property is sold within three years, the profit is treated as shortterm capital gains and taxed accordingly.
After three years, the profits from the sale are categorised as long-term capital gains and taxed at flat 10% or 20% after indexation. However, there is no tax on the profit if the sale proceeds are used to buy another house.
RULE V: Follow big builders, but not blindly
Locations or cities where big developers are buying land could be potential hot spots. But remember builders have deep pockets and longer staying power than you may have.
When a mutual fund adds a new share to its portfolio, many stock investors follow suit. The logic is that if savvy investors are buying that stock, there must be something in it. You can do the same with real estate. Just keep your eyes peeled for news on where the big daddies of real estate development are buying land. In a few years time, that land may be worth several times the purchase price.
Till sometime back, this was an impossible task unless you had inside information. Real estate deals used to be so opaque that no one got to know which builder had bought the land until a project was suddenly launched. That’s no longer the case. Most national-level realtors are now listed in the stock exchanges—their operations are more transparent and their plans better known.
When a big builder moves in, the whole area gets a facelift, pushing up the value of the property. Often big builders move into an area only when they get a whiff of a new infrastructure project there, sometimes ahead of others knowing of it. Though an initial spurt in the new El Doradoes identified by a real estate developer is usually due to speculation, once the projects are launched and the supporting infrastructure begins to take shape, there is consistent appreciation in property prices. For instance, since Omaxe and DLF announced plans for projects in Indore last year, prices in the project locations have gone up by almost 30%.
There is a caveat, though. Just as mutual funds have a long-term perspective, realtors too think several years—even decades—ahead. So don’t blindly follow a big builder into the countryside where nothing may come up for another 10-20 years. Get some idea of the time frame that the builder has in mind for that city, town or area.
Says Anshuman Magazine, managing director of CB Richard Ellis: “Big real estate developers are buying land everywhere these days. They are taking long-term positions where they may hold the land for up to 20 years before anything comes up on it,” he cautions. Buy only if there is potential for job creation, if companies are moving in and if the infrastructure is in place. As the map on the facing page shows, big builders are moving to newer markets and locations. So could you, especially if you are an investor.
RULE VI: If you are selling, be a month early than late
Timing the real estate market is just about as difficult as doing so with the stock market. Set a profit target and sell.
The days when a seller could ask for a price that was 10% more than the last deal in the area—and get it—are getting over. While it is not really a buyer’s market yet, brokers are now advising prospective sellers to ask for a price that competes with the price tags on other houses in the market.
“Pricing is absolutely critical right now,” says Harendra Kumar, a property dealer in Noida, where sales in the first six months of 2007 have been down by almost 50% compared with the same period of 2006. Low sales hurt property dealers such as Kumar, which is why he wants sellers to be more realistic in their expectations.
Sometimes the wait for a higher offer can turn out to be endless. Anand Narola bought a plot in the Adajan Road area of Surat for Rs 12 lakh in 2003. The property doubled in value in three years. Narola rejected offers of up to Rs 25 lakh in December 2006 because he expected prices to go up further. Now he can’t find a buyer at Rs 22 lakh.
In South Mumbai, one of India’s hottest real estate markets, prices fell by almost 20% between 2001 and 2003. A seller betting on a hike in 2001 would have lost at least this much or would have had to hold on to the property for the next four years to get the same price. As the chart (on the right) shows, sellers in the area could be facing a similar dilemma today.
So, set a realistic target for your property and sell it when that target price is offered to you. Wait for too long and you may lose out like Narola. Remember it is more difficult to sell in a declining market because there are a lot more sellers than there are buyers.
Is there a way to determine your property’s value without getting carried away? Sure there is. Look at houses that are priced as much as you expect for your property and ask yourself: “Which of these would I rather buy?” If you can objectively answer that question, you won’t find it difficult to set a price for your house.
RULE VII: Save to prepay your loan
The longer the loan tenure, the higher the absolute burden of interest. The key is to keep the tenure as close to the original as you can with a higher EMI and/or prepayments.
You took a floating rate home loan for 20 years three years ago thinking that you would be out of it when you are 55. But ris -ing interest rates have extended the tenure of the loan to over 28 years. Worse, you are already 38 and the repayment tenure is going well into your retirement. So your bank wants you to increase the EMI or make a lump sum payment to bring down the loan term.
This is a common problem. Rising rates have upset the household budgets of thousands of home loan takers across India. The problem is compounded if the loan is for the long term (15-20 years). A lot of home buyers took long-term housing loans without realising the con -sequences of a 20-year loan.
Even though a low EMI of a long-term loan appears attractive, it translates into a very high total interest outgo. If you have taken a floating rate loan for the long term, you can still set things right by prepaying the loan (see table). There is usually no prepayment penalty if the amount is up to a fixed proportion of the outstanding loan.
Harsh Roongta, CEO of Apnaloan.com, advises borrowers to pay a lump sum that brings down the EMI and loan tenure to the original level. “For every 1% hike in interest rate, you have to pay around Rs 7,000 for a Rs 1-lakh loan with a 20-year tenure,” he says.
You may also consider liquidating investments that are likely to earn lower returns than the interest charged on the home loan. One idea: dip into your Public Provident Fund (PPF) account which earns 8% to pay off that 12% home loan. Then replenish the PPF with the EMI you will save.
RULE VIII: Commercial realty is tempting but risky
If understanding the housing market is a challenge, commercial real estate is even more complex. The thumb rule: stay clear.
It is a golden rule that financial experts swear by: never invest in something you don’t understand. Whether it is stocks, commodities or futures trading, stay away if you don’t have the knowledge or can’t monitor the investment.
Ditto for commercial real estate. No matter how enticing the launches of new malls and commercial properties sound, steer clear if you do not understand the mechanics that drive this market.
The commercial real estate market is significantly more complex than the residential real estate sector. Additionally, there is no rigorous source of data for you to base your decisions on. In the resi -dential real estate market you can get an idea of how the market is doing or find out how much a certain property in your neighbour -hood was sold for. That’s simply because more homes are sold and bought than shops.
The commercial property market is also fast changing. Preferences of retailers have under -gone drastic changes. Only good quality space can guarantee you a tenant. Besides, commercial prices are already too high in some pockets.
“Prices have reached a level where services are no longer competitive and have begun seeking alternative locations,” says Punit Beriwala, Chairman and Managing Director, Vipul Infrastructure. The high property prices have led to a frenzy of construction. Over the next few months, the new commercial space being created will exert pressure on prices.
Of course, commercial property could offer great returns, though at greater risks. Riaz Ahmed, a Punebased businessman invested Rs 8 lakh in a shop in Wakad area in 2003 and sold it this year for Rs 15 lakh. He now wants to reinvest the amount in real estate, though not in commercial property but in residential space.
“There are too many conflicting signals about the commercial market. Since there will always be a demand for homes, I am sure I will make a profit from this invest -ment,” he says.