Arundhati
Bakshi-Dighe
Thirty
four-year-old real estate broker Ram Prasad Padhi
does not believe in the booming stock markets, “Just
a piece of paper,” he says dismissing share
certificates. He likes investments that “one
can see”.
He
likes real estate. He likes it not because he made
a 20 per cent profit in just over a year from a
Borivili project, but because, though he paid money
in installments to buy, when he sold, he got a lump
sum return.
Padhi
looks at real estate as an investment opportunity,
while for most people, it is a one time transaction
- when they buy their homes. Real estate is a great
investment option for, not only does it have the
potential to make a profit over time, but while
the investment matures, it gives inflation-linked
returns, in the form of rent. Like all other investment
options, real estate can be a great way to grow
your money if you know how. Here are four things
to build into your investment decision.
Do
you have the risk-appetite to invest in property?
Property investing is not for everybody. It demands
a high entry price, suffers from lack of liquidity
and an uncertain gestation period. The minimum investment,
even for a small commercial property in an upcoming
area, is likely to be a few lakhs. This investment
is also illiquid, you can sell a few units of a
mutual fund investment without disturbing the entire
amount if you need some funds, but it is impossible
to sell, say a room, out of a property bought. How
long the investment will take to mature, too, is
uncertain. You could strike a gold mine, like people
who bought into the Delhi suburbs in the early 1990s
did, or you could buy during a boom and lose money.
More important than all these, is the risk of being
sold a dud. Property titles in India are usually
not clear and people have been sold houses that
did not belong to the seller. To take such a big-ticket
risk is not feasible for the average person. “The
entry cost, the levels of liquidity desired by the
investor, the gestation period in mind, the cost
incurred for monitoring the deal and for legal advice
are all very important factors in a property deal,”
advises Anuj Puri, Managing Director, Chesterton
Meghraj Property Consultants.
Choose
your location “The concrete and the cement
that go into building a house are all visible investments
that I make” says real estate advocate Ram
Prasad Padhi If you do have the risk-appetite for
property, then the most important thing to consider
is the location of the investment. First, choose
the city since real estate returns show significant
variations between markets. Says
B
Srinivas, National Manager (Financial Services Group),
Cushman and Wakefield: “Real estate investment
in the mature markets like Mumbai and Delhi would
have yielded a stable 9 per cent to 11 per cent
gross over the past 3 years, while emerging markets
like Bangalore and Hyderabad have given between
12 and 16 per cent”.
Next
choose between residential and commercial property.
“Capital appreciation on residential property
can be as high as 10 per cent per year compared
to five per cent in commercial property,”
says Puri. Then choose the area. Find out how the
area has developed in the past few years. Also try
and find out what the area will look like in future.
For example, property rates along the Metro Rail
in Delhi and those near the fly-overs in Mumbai
may appreciate faster than other areas. Or property
rates along the Golden Quadrilateral may rise faster
than along other new highways. Now, choose a developer
since areas which have good developers working on
projects are always attractive.
Advice
from Niranjan Hiranandani, Managing Director of
the Rs 200 crore Hiranandani Constructions Group.
You cannot buy a property one day and then sell
it off the very next day. It is always advisable
to keep enough money in the bank which can be used
for immediate and urgent needs. Property investment
should be done by persons who have deeper pockets
and longer-term view of their investments. From
a long-term financial-returns perspective, it is
advisable to invest in higher-grade commercial properties.
However, for small-sized investments (upto Rs 5
crore), it may be better to analyse prime residential
developments. Calculate the yieldYou need to find
out if the money you invest in property is better
off in an alternate investment. For this you calculate
the yield, that is nothing but the rent the property
will get, divided by the market value of the property.
Suppose a Rs 30 lakh property is giving a rent of
Rs 12,000 a month or Rs 1.44 lakh per year. You
are getting a yield of 4.8 per cent (Rs 1.44 lakh/Rs
30 lakh). However, RBI bonds give tax-free returns
of 6.5 per cent. So you may be better off in risk-free
RBI bonds purely in terms of annual return, if you
do not take into account the future potential of
the property to gain in value.
Do
the due diligence For such a large ticket investment,
you need a big-bang due diligence. Plenty can go
wrong in a property deal and there are enough stories
of people being sold houses that were sold simultaneously
to ten other buyers. The antiquated legal system,
of course, is of no help to sort out these problems.
Examine the profile of the real estate developer
and his experience in the local property market.
Check the ownership of the property. “Check
that the property is not involved in some public
interest litigation or any environment related litigations,”
advises Puri.
Remember
that property has the potential to give great returns,
but it has a high-risk tag attached to it too. But
for land-lubbers like Padhi, property is the way
to great returns. “'Land is always scarce,
land is diminishing, but demand is growing,”
says Padhi, as he picks up the latest issue of a
property paper trying to decide his next buy.
Publication:
Economic Times
Date:
December 21, 2003
