Real estate is considered to be an immovable asset. In most cases it refers to an area of land (naturally this must be a fixed location). It can include assets contained on or in the land. Examples would be buildings, minerals, other natural resources, crops upon the land and the water within the land. Real Estate has traditionally been a reliable investment option seen as less risky than investment in other areas such as stocks and shares. But is it wise, at this moment in time to be considering investment in Real Estate in India?
Real Estate has never been a fool-proof form of investment, there is no such thing, but it could be considered harder to make a loss in this area than in others. The price of prime Real Estate has for most of history increased in value to the extent that it outgrows the negative effect of inflation. There have been exceptions to this rule. When speaking about India specifically, we can take the Indian ‘property bubble’ of 2001-2007. Around this time it seemed that there was no stopping the Real Estate sector, as buildings were being constructed, and money was being injected at record levels. It was speculated that a lot of the funding for these projects was sourced from black money. When the ‘property bubble’ broke due to over-availability of commercial and residential buildings that nobody wanted or could not afford, the result was that several large property development companies defaulted on their loans. Several developments were seized by creditors and auctioned. The following years saw a slump in prices as they were slashed to encourage buyers to take up the unoccupied buildings.
If this is the case then why invest in Real Estate? In 2016 the Real Estate (Regulation and Development) Act, 2016 came into being. This Act of parliament lays down several important rules that aim to make the building and construction elements of Real Estate more transparent and safer for home-buyers. Previously home-buyers were being taken advantage of by builders, and many found themselves in problematic circumstances when builders defaulted on loans that were taken out under home-buyer’s names. The Act purports to stop the injection of black money into property developments by demanding that 70% of the money is deposited via cheque so that its origin can be traced. All commercial and residential Real Estate projects over 500sq/m (or 8 apartments) must be registered with the Real Estate Regulatory Authority. It also makes it mandatory for the carpet area of a property to be specified to the buyer. This is to avoid the practice of builders stating built-up-area or even super-built-up-area measurements to confuse buyers into thinking the property has more useable space than it actually does.
With the new Act serving to clean up the Real Estate Development sector, renewed faith in the market has seen it return to its usual self after the disaster of the ‘property bubble’ bursting. With this in mind, we can confidently say that there are still future benefits of Real Estate investment in India. But having said that, we must be mindful of how to invest in Real Estate. Careful consideration must be given to the location chosen to ensure maximum return on investment. Even the best luxurious accommodation will be in low demand if it is constructed in a remote area devoid of amenities or work prospects. Land in such areas may seem cheap, but there is a reason for that; low demand. Even the oldest, poorest condition building may be worth a lot of money due to its location if the area is desirable. One trait among Indians is that they like to stick together. The cost of housing is inflated by the desire to live close to family members. Houses in older, more established areas often sell for much higher prices than equivalent or even better living accommodation in new developments for this very reason. There are multiple ways to be a winner with Real Estate. There are many options. Here are just a few examples:
• Purchasing plots to leave them undeveloped and sell on at a profit when development grows up around them
• Purchasing existing buildings in order to earn money from rent (passive income)
• Purchasing plots to develop. Adding value by constructing buildings then selling or leasing them.
• Purchasing land that is rich in minerals or natural resources and then selling the rights to mine or extract the resources
• Purchasing farm land and then profiting by sale of the crops.
In any of the cases where the land is to be re-sold, the most important consideration to be made would be to make sure you purchase in an upcoming area. It will be necessary to study the area in depth before taking any big decision. Prices are driven up by demand. Buying early when there is very little demand will enable you to buy for a low rate. As an area becomes developed and established the demand rises and so does the value of the land. Choosing the best area will depend on such factors as local amenities, availability of jobs, threat of natural disasters, flood defense, water availability, connectivity to road and rail networks, and many more. You will be best advised to avoid areas which are experiencing a downturn in their fortunes. Sometimes areas which were once posh and upmarket become run down and turn into slums. The famous saying goes ‘always buy the worst house on the best street, never the best house on the worst street’. The saying makes note of the fact that it is relatively easy to tidy-up or recondition a building therefore increasing its value, but it is not usually possible to make a building desirable if it stands in an undesirable location. Unless you can purchase the entire street you are unlikely to be able to have any power to reverse an area’s slump into decay.
Before taking any big decision, it is always worth getting the opinion of an expert. Talking through the pros and cons of any big financial investment will help you to make an informed decision based on market facts and experience. Buying a family dwelling for the purpose of living there, with no intention ever to sell is a completely different situation from buying purely to sell at a profit. There are instances where buying Real Estate is a sensible option as part of a balanced investment portfolio, to counteract the risk of investing in other fields, or simply to compensate for the rate of inflation. Decisions should not be made on impulse or with emotions running high. It is recommended to discuss your ideas with a professional portfolio manager and not simply rely on the words of property brokers, builders or sellers who have no consideration for your best interests and simply want to sell their property to you.
Investment Advisory: https://gwcindia.in/