Is Real Estate A Safer Investment than Equities?

For about 61% respondents, real estate is a safer investment bet than equities, revealed a recent survey conducted by Roof and Floor. With rising stock market volatility, real estate emerged as the most preferred asset class for investment. Clearly, the pandemic has further strengthened the desire to own a home. The reasons? Safety and sense of security that comes with having a roof over one’s head.  “The security of owning a physical asset during a coronavirus-like crisis now combines with a rising aversion to high-risk investments. As a result, the demand for residential real estate has increased. Millennials are key demand drivers, their preferences now dictated by the prevailing uncertainties, stock market volatility, and recent-past financial sector incidents,” explains Anuj Puri, Chairman, ANAROCK Property Consultants.

Best time to buy a home

About 77% respondents are looking to buy a home in another three to six months. These people are looking to grab the offers and discounts that developers have rolled out to attract consumers after the lockdown.  About 45% respondents think that a year from now would be a good time to enter the market, while a good 59% are unsure about their home buying decision. This can be attributed to job insecurity and slow economic growth. These respondents are also waiting for the property prices to correct.  When asked what would trigger them to buy a home in the current scenario, about 28% respondents voted for a reduction in prices. Price correction was followed by lower interest rates, relaxation in government taxes & duties, and relaxed payment schemes. 

Importance of a study room

During the nationwide lockdown and changing work patterns, homes were turned into workplaces, schools for kids, and a place for us to exercise and relax. Thus, the need for that extra space has further strengthened.  For about 88% respondents having a study room is very important. 

Scope for demand

With migration as the core idea behind job search in bigger cities, the real estate has boomed in the last 2 decades and is likely to grow in the coming years as well. People are ready to invest in small flats with dual purpose i.e., to live and to do investment. So, keeping that in mind, the demand is growing rapidly, and it is expected to rise till 2025. So yes, scope for demand makes it a profitable business with many players. The ratio of defaulters is high, which again makes it a smart move for genuine players to make a better scope in the market and attract customers with timely delivery of projects.

Learn the gap between owning and renting

There are two categories of buyers, one is those who are end-users of property and the other are those who invest to earn rent or resale the property to generate revenue and multiply money. Understand and analyze your purpose and then invest accordingly. If you are an end-user, look for properties built with amenities and for renting purpose, you might look for cheaper ones, in order to maximize profit in near future.

Invest in the right technology

It is important to understand that technology has taken every space, including real estate. You will be surprised to know that it has made activities like rent collection, communications between the landlord and the tenants easy to follow. In order to gain maximum benefits, you should invest in the right tech. For instance, you can use landlord software to help manage the property better. Also, technology saves time and costs and helps focus the resources on other aspects of the property.

Lesser risks in smaller markets

If experts are to be believed, the smaller the market is, the lesser the risk is in real estate. Due to smaller geographical area, bigger players don’t jump into the market and this gives a wider scope for the smart local players to play and generate revenue. Also, the ratio of price of purchase and rent is way different as compared to metropolitans, which further increases the scope for people to invest in smaller cities for the purpose of investment and renting.

Is it wise to invest in Real Estate in India in 2020-21?

According to real estate experts, it’s a big yes to invest in the real estate sector in the next two years and everyone is optimistic about the future of the real estate industry in the country and look forward to brighter days. It is believed that 2020 has great potential for both residential and commercial real estate business. In the last few years, co-ed office space has gained impressive traction in most cities with IT/ITeS players contributing to most of the demand. Experts suggest that to make it a smoother pathway for investors and developers, the government needs to take more quick and bold corrective measures for the housing and urban infrastructure sector, so that demand can be boosted to an unprecedented level. Also, it is expected that whenever the government intervenes with corrective measures, the concept of co-living will see widespread acceptance in India. This trend is acting as a catalyst for an organized rental market in cities such as Bengaluru, NCR, and Pune in the same way as co-working spaces did for the commercial space. Also, in 2020, the Indian real estate system will exhibit more financial discipline, accountability, and transparency due to the structural economic policy reforms introduced last year.

Estimate Affordability

Real estate property is one of the costliest investment one indulges in, in life. Property prices in India can range from few lakhs to multiple of crores. Hence, before venturing out, it is essential to answer, “how much I should spend in a property purchase“. How to know? This can be done from the thumb rule shown in the above flow chart. A person whose income is Rs.100,000, and has a saving of Rs.5 lakhs can afford to buy a property of Rs.35 Lakhs. Apart from one’s income & savings capability, one’s credit rating also plays a major role in getting home loan. Unless one has a reasonably high credit score, getting loan is difficult. There is one more aspect which increases the cost of real estate property. There are statutory charges associated with any property purchase. Approximately “other charges” costs around 10% extra. This further effects ones affordability. Typical break of this cost is shown below: Stamp Duty (6%). Registration (0.5%). Brokerage (0.5%). Advocate Fees (0.1%). Home Loan Processing Fees (0.1%). Tax Deducted At Source (TDS-1%). Society Administration Charges (1%).

Prepare For Home Loan

First one must check his/her credit score. If the score is low, take steps to improve it. Why credit score needs checking? Because banks will not give loan if the credit score is below 700. Hence checking the score before loan application is better. You can check your credit for free on website of CIBIL. In addition to the credit score, the banks will also like to double check the “EMI paying capability” by scrutinising other documents. Hence for a borrower, it is better to keep these documents handy: Latest salary slips (of last 6 months). Income tax Return (ITR) of last year. Bank Statements (of last 6 months). Statement of Assets (financial & physical). Address Proof. Identity Proof. Other documents as asked by the bank.

Criteria For Property Selection

Target should be to buy a good property. What is a good property? It must display at least two characteristics: (a) Attractive Project Plan, and (b) Value for money. What is attractive project plan? Distribution between open area and occupied land (by buildings) must be optimum. The more is the open area, the better.  What is value for money? Property should not be expensive. How to define expensive? I follow this rule of thumb for myself. Rental yield of the property should not be less than 3.0%. Suppose the property is valued at Rs.35 Lakhs. If put on rent it will fetch Rs.10,000 per month. Its rental yield will be 3.4% (10000×12/3500000). Price 3.1 Affordability: If ones affordability is Rs.35 Lakhs, and the property on offer is costing Rs.40 Lakhs, it is clearly not affordable. This is one reason why affordability calculation in step #1 is essential before making a commitment. Vicinity 3.2 Location: Property investment must be done in a location which is known to the investor. Investing in an unknown city/town shall be avoided. Location of property within the city is also important. A property which has schools, markets, hospitals nearby is preferable. 3.3 Transportation: Approach road is important. If there is a broad and paved road connecting the property, it’s a big thumbs up. Public transport connectivity like metro, bus depot, auto rickshaw stand, Ola/Uber connectivity also adds to the value. 3.3 Negatives: Special attention must be given to the drawbacks of the property. Typical ones can be like busy roads, too close to railway station or airport, traffic noise, remote location, old society etc. These factors cause hardships & also lowers the quality of life of the residents. Specification 3.4 Type of House: If the preference is a row house, multistoried apartment will not work and vice versa. Before venturing out for property search, type of house must be finalized. 3.5 New or Used: Secondhand homes can be great value for money. They have an advantage of ready possession and established locality. They may also have pre-built facilities like internet, heaters, woodwork, modular kitchens etc. But a new property also comes with its own advantages. 3.6 Number of bedroom: For a small family, even a studio apartment is enough. For others, requirement may range from 1/2BHK to higher size flats. I personally like evaluating property first on basis of their size (in SQFT), and then on the number of bedrooms it can offer. 3.7 Open Floor: There are some properties which has slots & pockets for wardrobes, cabinets, fridge etc. Such homes offer better ‘open floor space management’ after the furniture's are put in place. Generally speaking, a house must be able to accommodate your special furniture's (like over , bicycle, pram etc). 3.8 Parking: If you own a car, two-wheeler etc the property must offer an adequate parking facility. Other Features 3.9 Communication: If the property has facilities already laid for services like cable TV and broadband etc, it can save few bucks. Generally speaking, look for mobile & internet connectivity in the area. There are some areas which has inherently poor mobile network connectivity. 3.10 Extension: Over a period of time, owners like to extend their living space. Properties which has provisions for extension may prove handy in times to come. 3.11 Gardening: For some, building a hanging garden in their balcony is a big plus. If you are looking for a row house, check if the open space provides the possibility of gardening. Property with such provisions becomes desirable. 3.12 Present Condition: Check the ‘built condition’ of the property. If it is a new property, no problem. But in a secondhand house, rework or repairs may be required. Being aware of this extra cost before taking the possession is advisable. 3.13 Condition on Outside: Apartment may be good from inside, but the outside building is equally good? Make sure to check the property from outside. Scan the painting, cracks, seepage, loose wirings, encroachments, quality of parking etc.

Ask Your Property Agent

What is done in step #3 above takes care of the “big things”. There are also minor queries that needs attention. A property agent will be able to answer these question (honestly). There are like strategic questions which must be posted to the agent or to the present owner: Remained Unsold: For how many days the property has been in the market for resale? Some properties gets sold in days. Some properties take time. Idea is to know the cause of the delay. The reasons could be overprice, bad Vaastu etc. Occupation History: Preferably, buying a property which has multiple occupations in the past shall be avoided. Buying a second or third hand property should be the goal. If the property was occupied by the first owners themselves, it is a big plus. Current Possession: Who is currently occupying the property? If there are no people living inside, no problem. But if the property is occupied (say by a tenant), when they are going to vacate? Since how long they have been staying? Seller’s Direct Contact: Before taking the final decision, it is always better to have a one-on-one discussion with the owner. One may not like to buy a property from a shady or inappropriate character.

New Home: Extra Points To Take Care

There are few unique features comes to face only with a new (under construction) real estate property. They also needs separate attention and handling: Booking Amount: Purchase of new, under construction property is often initiated after inspecting a “vacant land” and an “approved plan”. To initiate the purchase, the buyer pays a booking amount to the builder. Make sure to ask for the refund policy before making the payment. First Deposit: If you are going for the home loan, the first deposit (which will be your self contribution) needs to be paid soon after booking. Why? Because only after this the loan disbursement process will be initiated. Make sure to keep your own legal advisor informed about these payments. Pre-Approved Loans: The builder may lure you to go for their pre-approved lender (for loan). You are not obliged to take their advice. You can go with your own bank. Completion Time Line: From the date of booking, a typical Indian builder may take upto 3 years to complete the project. Make sure to ask the builder about the time lines (& milestones) of the project. Ask how the builder is going to compensate in case of delays. Withdrawal Clause: There may be a condition where you may want to exit the deal mid way. This is where withdrawal clause becomes handy. Read and discuss it with your builder. How much will be your loss? How the already paid money will be returned etc. Warranty: Generally, a newly constructed buildings has a 10 year warranty for structural faults. There is 2 years warranty for general defects. Make sure to ask your agent/builder about the same. Finish House: What is included in the finished house? Final paint, electricity fittings, plumbing, finished flooring, modular kitchen, wardrobes, furnitures etc. Idea is to know, in what finished condition the house will be delivered to you.

Check The Builders Reputation

Try to find out the reputation of the builder. Some developers are prone to carry problems related to plan approvals, last minutes changes, work delay, bad quality construction etc. Idea is to not fall for such developers.  The best way to identify a good developer is by visiting their old sites. If possible, meet few residents to get a feel. Few key attributes of a good developer is: Timely completion.  Quality project (outside ambience) layout.  Good flat layout (inside design). Superior construction quality.  Quality of installed fittings (lighting, faucets etc). A combination of ‘good developer’ and a ‘cost effective property’ means good investment. 

Look for A Property On The Outskirts

Often, properties which are within the city are expensive. There is a way to identify a good and inexpensive property. Look for properties which are coming up right on the city’s outskirts. Do not go too far out of the city. Idea is to remain in the city – but at the outer boundaries. I have found this method of locating projects very helpful.  At the time of purchase, such properties may look slightly distant. But within 2-3 years, they become the next city hub. Buying such properties, and holding them for 3+ years can prove profitable. 

Book Property In Its Project Launch

Project launch is that moment of time, when the developer is first displaying its project plan to the public. At that time, the developer is also gauging publics perception about its project.  Booking property at project launch can be more profitable. Builders are often quoting 20-30% less price in its launch. If the response of public is good, during project launch, price of property will go up. For public, project launch price is often the best price to buy. Keeping an eye on project launches of good developers in your city is a good idea.  It must also be noted that, during project launch, the builder may not have already taken the necessary project approvals. Hence it is essential for buyers to ask about the schedule of approvals. Only after the approval, construction will start.

Look For A Small Property

We often get lured into buying an oversized property. This is a mistake. It not only costs more, but it also means higher long-term maintenance costs. Reports have proved that, smaller sized properties are often better value for money for the investor. Compare a 2BHK and 3BHK apartment. Which will get sold first? 2BHK, as it is more affordable.  Similarly, a 1BHK apartment can be bought and sold the quickest. Small size apartments are always in higher demands. Even high net-worth investors, would like to buy multiple 2BHK homes over large penthouse. Why? Two reasons:  Less money is locked in one property.  As size is small, liquidation becomes easier.  There will be bigger range of buyers for small properties. 

Should I invest in real estate given the current market conditions?

Demonetization resulted in a dip in prices of real estate properties in India. The home loan interest rates are at all-time low. A series of regulatory reforms such as RERA and GST, the introduction of schemes like Housing for all, PMAY-CLSS and tax exemption for affordable housing projects by the government have made the real estate market one of the safest investment options.

What documents should I look at before buying a property?

You should look at the building plan ownership, approved plan layout, ownership documents, visit the RERA website and see the RERA Registration in case of new properties, carry out title search in case of resale properties etc.

What are capital gains on the purchased property?

The profit you make on the sale of property is called capital gains. As the property is considered as a capital asset, the profit you make is taxed under the capital gains tax.

Can I claim tax deductions on my capital gains from the sale of a property?

Yes, tax deductions can be claimed under Section 54 (EC) or if you buy or construct a new home within two years of the sale of property from the capital gains.

What is meant by a sale deed?

A sale deed is a document made on the basis of previous ownership for transferring property from the seller to the buyer. Once it is made, it gives the sole ownership of the property to the buyer.

What have been the contributions of IIFL towards financing real estate projects?

IIFL AMC and Finance has invested in over 100 transactions over the last few years and has developed skills for legal, technical and credit due diligence while completing the investments.

Does IIFL provide loans for construction and completion of real estate projects?

Yes, IIFL Finance and Housing Finance provide finance for construction and working capital requirements of residential and commercial projects across various geographies, which can be taken at an affordable price.

Does IIFL has a distribution network?

IIFL Retail Distribution has a strong network across India with 4 million customers across 1,200 locations with the addition of assisting clients in buying and selling of properties across several locations.

Can I take a loan under the PMAY-CLSS scheme from IIFL?

- Yes, IIFL provides finance under the PMAY-CLSS scheme and has disbursed more than Rs450cr under the scheme in the last two years.

Maintenance charges

Most people also tend to think that while real estate requires outflow in the form of maintenance charges and repair costs, equity creates inflows in the form of dividend. Obviously if you rent out your property it can create an inflow, but then it creates another issue of getting the right tenant.

Effect of Business cycles

Lot of people have a misconception that Real estate is not affected by business cycles. This is not true. As explained earlier, while the period from 2007-2012 has been a golden period for investors, since 2012 Gold has been on a downtrend. For a retail investor looking at exposure in real estate, projects in areas expected to emerge as the next residential or business hubs are attractive investment opportunities. If we analyze the Mumbai real estate scenario as it existed 15 years ago, investments in office and residential premises in the then emerging area of sub-urban Mumbai like Bandra-Kurla Complex have provided higher returns than investments in old hubs of Fort, Ballard Estate and Kalbadevi Road. In the city of Ahmedabad, smart money has shifted from Relief Road to Ashram Road to C.G. Road to Satellite Road to S.P. Road, and in the process, generated multi-fold returns for investors. One attractive option for a retail investor with adequate investible surplus, interested in investing directly in real estate, is to select an emerging hub on the outskirts of a city and buy a commercial property there, which can be rented out to a reputed corporate tenant like a bank or an insurance company. Such an investment has the potential to provide attractive rental yields as well as capital appreciation over a period of time when the city extends its commercial activity.