First they told us that the real estate boom was a bubble. Then they said things had never been better. After that they said this was the beginning of a crash in property prices. Then they said this was only a correction, which would soon stabilise.
Then they said it was a correction in selected areas only, but a boom in others. One quarter into 2008 and some things are still as clear as, well, mud. That’s why we decided to check the ground reality for ourselves and bring you the whole picture. After all, what really matters to you is whether this is a good time to buy or sell property, or if real estate investment is a good idea anymore. And that’s exactly what we have set out to answer over the next several pages.
Yes, there was a boom in the property markets, but that seems to have come to an end. “I would say what was happening in the past two years was abnormal. How else do you justify a 300-apartment project being sold out in two days without even the construction being started? Now sales are down to a more normal level and projects are being sold gradually,” says Anshuman Magazine, CMD, CB Richard Ellis (South Asia).
The slowdown today is largely the result of priceshaving risen too fast, and interest rates giving company to high prices. Buyers are naturally staying away from a market where they are made to pay prohibitive prices. Sellers, meanwhile, are hoping that seasonal sales will go up and that interest rates will be brought down enough to make buying property seem attractive. However, neither prospect seems likely—at least in tier I cities.
The slowdown in sales, however, does not mean that prices have come down everywhere or they are likely to come down. “Developers are flush with private equity and IPO-based money and would certainly not sell at substantially reduced rates as they have prolonged holding capacities,” points out Anuj Puri, chairman of real estate consultancy Jones Lang LaSalle Meghraj.
• Prices have stabilised in many locations and interest rates are likely to remain stable
• Explore areas with good connectivity, even if the distance from city centre is more
• Don’t wait for prices to fall; decide depending on your income and cost of borrowing
Sellers• Number of buyers has come down drastically
• Don’t sell unless you need money or get a good deal
• If there are infrastructure improvements in your area, demand and price will pick up
• If you have to sell, go by the market valuation and don’t stick to the highest value you have heard
• Upgrade your house to get a premium
Investors• Not a good time for short- term investments (less than 3 years)
• If investment horizon is more than 5 years, returns will be good
• Look outside your city for investments
Demand is strong in the smaller cities and towns, where prices have greater scope for appreciation and where buyers are prepared to grapple with high interest rates. Places like Chandigarh, Ahmedabad, Nagpur and Coimbatore, which have the double advantage of being economic centres on their own and enjoy proximity to bigger economic hubs like Mumbai, Delhi, Bengaluru or Chennai, are still seeing healthy demand both from investors and end users.
The other piece of good news is that the real estate growth prospects seem intact when taking a long-term view (five years plus). And since real estate investment is generally for the long term, this is glad tiding for investors. “There is no change in the factors that have driven growth this time. In fact, most of them like income levels and job confidence have actually become better,” says Knight Frank’s Jayant Verma, who expects the overall market to remain stable.
Much of our information has been gleaned from people who really know everything there is about buying and selling property: brokers. Real estate brokers in 30 cities share their opinions and ideas on why prices are behaving in this way, on whether supply will pick up and whether demand will influence prices. More on that later. But that still does not tell us what to expect from property this year. So, we asked a cross section of experts: brokers, housing finance institutions, banks, real estate developers and more. The answers were many, but one thing seems clear: this is not necessarily a market for investors in real estate, but it’s most certainly a good one for those wanting to buy their first house.
According to experts, over the long term, the demand for commercial, retail and residential segments will remain strong in light of good economic performance. “While potential buyers may be holding their decisions, they are not completely out of the market. This is shown by the increasing number of enquiries as more and more people want to check out the prices before they buy,” says SK Jain of jaaydaad.com, a real estate portal.
As far as the smaller cities are concerned, the most positive trigger from an immediate perspective is the possibility of interest rates coming down because most of the infrastructure projects that affected the price in a city are still under construction and these markets are more sensitive to interest rates than markets in metros that are commonly on investors’ radar. “Sales in the past few years have been to speculators, and this stock is coming back into the market, putting pressure on prices. In the short term, prices may run up, but in the medium to long term, they will be determined by the wallet of the middle-class Indian,” says Magazine.
One way of looking at the longterm picture or of reasoning why the real estate markets are not headed for a crash is that on average, the real estate sector has grown 1.5-2 times the GDP growth rate. So, if the economy continues to grow as projected at 9%, real estate will grow at 15-20%.
Another factor that developers point out is that all the foreign direct investment and private equity funds that have entered the market last year ($6.5 billion) will be locked for at least 3-5 years.
So even if the flow of funds slows down, the market will be sustained. Another cushioning factor for residential property is that almost 60% of new projects are in the residential sector, where investors now comprise 20% (down from 35% till about 18 months ago). So the growth from now on will be more end-user driven.
The Interest Burden
Not only have house prices gone through the roof, interest rates, as mentioned before, have kept up. And since up to 90% of home loan takers have borrowed on floating rate, they are feeling the pinch. This has an impact on the number of houses bought. Although interest rates have come down marginally, the drop has not been big enough to encourage people to borrow.
The movement in interest rates affects not just residential property; office space, retail, hospitality, etc are highly leveraged projects and any fluctuation in the borrowing rate affects both supply and demand. “Assuming no change in loan tenure, a 1% increase in interest rate could reduce buying capacity by 5-7%. Further, taking an equivalent drop in the selling price (to compensate for decrease in buying potential), the discounted profitability of a project can decrease 13-16%,” says V Chandrasekhar of Indian School of Business, who tracks the real estate sector.
Whether interest rates will go down further will depend on the RBI’s credit policy in April, say bankers. The current round of rate cuts by banks was the result of improved margins. “We revised interest rates downward for existing buyers because our profitability margin hit a record of 2.35%; the highest we had had earlier was 2.17%. We normally plan according to a 2% margin. So, we decided to pass on the benefit to existing buyers too. However, we are still waiting for a direction from the RBI to see whether this will be sustainable or not,” says a banker.
One way of reducing your burden if interest rate differential between banks is high is by shifting your mortgage from one bank to another. “As a rule of thumb, if the new lender is providing a floating rate loan that is at least 0.5% cheaper than your existing lender and the balance tenure is not less than 7-8 years, then this is an option that you should definitely explore despite pre-payment charges that you might have to pay to your existing lender,” says Harsh Roongta of Apnaloan.
Buy Or Sell?
|Anshuman Magazine, CMD, CB Richard Ellis (South Asia)|
"In the medium to long term, prices will be determined by the wallet of the middle-class Indian"
Sanjay Chandra, MD, Unitech
"The returns that real estate has delivered in most cycles compensate for inflation during a long holding period"
|Anuj Puri, Chairman, Jones Lang Lasalle Meghraj|
"Even now, realty is the best long-term investment. It offers stable yields, capital appreciation, tax benefits and security"
V Chandrasekar, Indian School of Business
"Considering the rise in prices over the past two years, you can’t call it a correction—at best a little arrest in the price rise"
All of which still leaves us with the big question: is investment in real estate still a lucrative proposition? Should you wait to buy or to sell? One of the most important factors determining whether you should buy is the purpose behind the purchase—is it for your own use or as investment? If it is for investment how long do you intend to hold on to the property?
“Even in the present scenario, real estate is the best bet for longterm investment. It offers stable income yields, moderate capital appreciation with tax benefits and the security of a tangible asset,” says Puri of JLL Meghraj. True, as an asset class, real estate scores over others in terms of not only price appreciation but also stability. “Normally, real estate returns are in line with inflation and if we look at the current price rise, factoring in inflation during the stagnancy period, the returns that real estate has delivered in most cycles do compensate the investor against inflation during the longer holding term” says Sanjay Chandra, managing director, Unitech. Even in weak market cycles, property values double in five years, says Abdul Bari, a real estate consultant.
The basic determining factor should be the one reason that will lead to price appreciation and sustain future demand in the location. It can either be some kind of economic activity like opening up of an office space in a locality or a new mall or some infrastructure project like a flyover or a metro. Although finding a reasonably priced location within city limits might be difficult in some cities given the price increase in the last couple of years, it’s still not entirely out of the question. Next, look at connectivity.
Even if you missed out on the opportunity to pick up a low-priced apartment in a location that has since seen phenomenal demand, you still have the option of buying cheap in a location that is well connected to that area. When it comes to choosing between two locations, it is your priority that will be the guiding factor. For instance, if you are based in Delhi, would you pay a premium and settle for a flat in the city because of its better infrastructure or you would settle for a bigger house in a well-connected suburb? Improving infrastructure, rapid urbanisation and scarcity of land in tier 1 and tier II cities have resulted in creation of new corridors of development. These corridors are extensions of these cities and stand to gain from planned infrastructure.
The growth corridors have been categorised on the basis of three parameters: sustainability, economic environment and momentum. Sustainability consists of factors such as physical and social infrastructure, real estate development in the adjoining markets and the nature of economic activity.
Economic environment consists of the demography, corporate presence and the government policies for the area. Momentum is an indicator of the pace and direction of the development activities. The best bets would be those locations where the momentum is low but the sustainability and economic environment have been rated high. For example, regions like Greater Noida in NCR, Panvel and Virar in and around Mumbai, which have a moderate rating for momentum and high on sustainability as well as environment offer lucrative investment opportunity from a longterm perspective.
Sanjay Mathur of Pearls Infrastructure says long-term returns on real estate investments can be up to 200-300% if you choose your destination correctly (see box Gurgaon or Goregaon). If you invest in what is the periphery of the city today and hence cheaper, and if there is good economic activity there, the returns in the long term are definitely positive. “But real estate decisions are often emotionally driven too. Aspirational considerations may drive the investors to look at factors other than yield analysis.” says Mathur.
As a prospective buyer, this is the time when you should not rush through buying property. Instead go slow and wait and watch for good deals. Now that there’s a property slowdown with a slump in transactions and developers are feeling the funds crunch, some of them will offer good deals to property buyers by redesigning packages in order to make housing affordable.
In fact, developers in cities like Mumbai and Bengaluru have already started doling out freebies to sustain their customer base. These offers range from subsidised power back-up to subsidy on electricity bills, interest rate subsidy, free property insurance, etc.
Also, don’t buy just for rental returns; think about price appreciation too. Many investors just stick to the highest rent they have heard about in the area and make investments thinking they’ll get similar returns. Another factor to keep in mind is the monthly outgo if you have taken a loan to invest in property. An apartment that fetches a monthly rent of Rs 7,000 costs Rs 25 lakh. The EMI on a 15-year loan of Rs 20 lakh for that flat works out to Rs 20,000.
As far as the opportunities in the real estate market are concerned, there are plenty. Apart from peripheral locations in the bigger cities, tier II and III cities are also likely to witness growth, but in varying degrees. Particularly, those in the proximity of major metros and urban centres are likely to benefit from the growth dynamics of these “mother” cities wherein demand is likely to shift towards these settlements when property prices reach high levels within the main cities. Here, property prices would go up owing to the increasing demand. Again, if you are looking at investment, it is worthwhile to consider cities outside of where you stay.
The commercial and retail sectors continue to enjoy high demand. The factor going against the retail or office space market is that new locations are opening up faster than the residential sector.
But investing in commercial property is a different ball game altogether. All the noise about demand and growth in retail and office sector that you have been hearing is about A-grade office and retail space. One should keep in mind that the entry cost for an Agrade office space is much higher than a residential flat. Though the rental returns may be higher, the risk of high entry cost coupled with the difficulty in finding a tenant and selling a commercial property is greater. So unless you understand the market, individual investors should not venture into the commercial property market. Experts say that investment in land is a better option for individual investors, which if selected well will give a better yield and mobility of investment.
Look for signs of what big developers are doing. Developers normally lease commercial space if they expect rentals to go up and sell it outright if they do not have an optimistic view of the market. However, as Sanjay Verma of Cushman and Wakefield says: “If at all there is a slowdown, it will be a mild one given the demand indicators and the attractiveness of India as an investment destination.”
G Venkateswara Rao, 45, Hyderabad, Senior consultant, Datamonitor
Why did he decide to buy
• Tax savings associated with housing loans (50%)
• Increasing property prices in 2005–6 (30%)
• Increasing rental costs (10%)
• Peer/social pressure (10%)
• PLUS the intangible factor—the pride of owning his house
The cost-price equation
• Was paying Rs 3,600 a month rent for a 850 sq ft flat in Rajiv Nagar from August 2001
• Property prices in the area rose by 170% between 2001 and 2006
• Booked a similar flat in April 2006 at Rs 2,300 per sq ft
• Moved into his flat in October 2007
• By then rent he was paying shot up by 80% to Rs 6,500 a month
• The flat price has gone up by 26% since the time of his purchase
“Though paying both rent and EMI was difficult initially, I feel I made a good decision since property prices have gone up since I booked the flat”
My advice: “The EMI for a home loan should ideally be equal to the rent in the area or not more than 30% higher than that”
Abhay Kumar, 32, Delhi, Advertising professional
Why his buying is on hold
• Shifted to a rented flat in Dwarka in November 2007; is paying Rs 8,000 as rent
• Moved to Dwarka hoping to buy a house there after staying for a month
• Thought he would get a 3-bedroom flat for Rs 35-40 lakh, price is up to Rs 60 lakh
• For his budget, brokers are advising buying property 5-20 km from Dwarka
What’s His Plan
• Is contemplating increasing his budget
• But not sure if price of property in Dwarka will rise further or fall
• Looking out of Dwarka to east Delhi for better options
“I don’t know if this is the right time to buy because I wouldn’t like the price of property I buy at current prices to go down”
My advice: “Do your homework well before you decide on a location and don’t go just by what friends say”
Denaz Roy, Kolkata, Insurance adviser
Why she wants to sell
• Bought a 1,200 sq ft 2-bedroom flat in Vaishali (Ghaziabad) in March 2005 for Rs 25 lakh
• Following husband’s transfer, shifted to Kolkata (their hometown) in August 2007
• Now plans to settle down in Kolkata and sell Vaishali house
Why the sale is on hold
• Initially, brokers promised Rs 40 lakh for the flat
• But though buyers are in plenty, none is offering more than Rs 38 lakh
• Will hold sale till 2010 when metro rail will reach the area and push up property prices
“I am hoping that the strategy of holding real estate investment for the long term will pay off”
My advice: “If infrastructure in the area is visibly improving, hold on to the sale for better returns”
Gurgaon or Goregaon
|Property price||Rs 6,500 per sq ft||Rs 6,000 per sq ft|
|Average rent (2 BHK)||Rs 9,000||Rs 12,000|
On the face of it, there is little to choose between the two—they even sound alike. But prices of real estate in Mumbai’s suburb (that’s Goregaon) are Rs 1,000 less than in Gurgaon, where prices are at Rs 6,500 per sq ft. Is that good enough reason to consider an investment in Gurgaon? Not unless you’re prepared to ignore the fact that the rental values in Goregaon are far higher than in the NCR city.
If you’re buying real estate as an investment, the returns you will get are something you should be acutely aware of. It’s not just a choice between Gurgaon and Goregaon; the underlying considerations remain whether you’re planning an investment in Pune or Hyderabad or any Tier-II city or growing suburb of any metro. Remember to look at how rental values have been growing for at least three years before you make any decision.
Also, as already mentioned, remember that if you’re buying land as an investment, you don’t have to buy in the city you’re based in. Look for property that will give you the maximum returns for a reasonable investment.
Apart from rental values, when you’re investing in property, look at other considerations such as infrastructure, access, cost of living, etc. It’s factors such as these that have pushed prices of residential property in Mumbai’s Cuffe Parade and Nariman Point to Rs 25,000-55,000 per sq ft. At these rates, you might find it cheaper to invest in a house in Dubai or even the London suburbs.
One, two or three
Major real estate destinations of the country and some emerging towns are classified under tier I, tier II and tier III categories. These classifications refer to the stage of real estate development in the city.
Tier I cities
Mature markets; entry cost high—Rs 30 lakh will get a two-bedroom flat in the suburbs, 15-20 kms from the city centre; appreciation in property prices will be relatively low.
Tier II cities
Experiencing spurt in demand and investments; both budget and premium options—Rs 30 lakh will get a built-up house in the suburbs or a three-bedroom flat close to city centre; good potential for price appreciation.
Tier III cities
Entry cost low—Rs 30 lakh will get a three-bedroom flat within 3 km of the city centre or a built-up house within city limits; perceived to have substantial demand potential because high quality supply is less and land prices low.
Tier I - Delhi, Mumbai, Bengaluru, Kolkata, Chennai
Tier II - Hyderabad, Pune, Ahmedabad, Chandigarh, Kochi, Nagpur, Thiruvananthapuram
Tier III - Nashik, Bhubaneshwar, Mangalore, Mysore
Other real estate stories:
Affordable suburbs (April 19, 2007)
Homing in on hills (Jan 25, 2007)
Home abroad (June 14, 2007)
Apartment or land? (May 31, 2007)
What’s behind the premium tag (November 2, 2006)
Weathering hikes (Jan 11, 2007)