Man does not live
only for food, cloth or shelter or for himself.
He has certain social responsibilities to provide for his family and
also for himself in old age. This naturally makes him to save some portion of
earnings and invest in lucrative portfolios. After the basic needs of food,
cloth and shelter are fulfilled he strives to improve his standard of living
and to enjoy the fruits of hard earned money.
Investment avenues
are many. But the investor should be prudent enough to select a proper area,
which is safe and secured with assured reasonable returns. Earlier the bank deposits, stocks, mutual fund insurance policies and bullion were most opted. With
increased business, globalization of
economy have unfolded many more areas. The investment has become very complex
which has led to the emergent of specialized investment advisers.
Bank deposits,
insurance policies, mutual funds have become unattractive because of low
returns and failure of many companies. Stock market is unpredictable and
volatile. Moreover, these investment avenues are for short-term which need
close monitoring. Further the quantum of investment is generally small.
In recent past real
estate has emerged as a safe and high yielding investment opportunity. Investment in real estate is a long-term investment and needs considerable amount. It is
not only financial but also sentimental, emotional investment.
The liberalization
initiated by the Government, opened up the hitherto dormant Indian economy and
many multinational companies set up their offices in major metros. The improved
pay pockets of vast middle class population offered as many investment routes.
With a desire to own a roof over their head as early as possible, the migration
of rural people to urban centers in search of assured income jobs, further
expanded the real estate market.
However, as the
demand exceeded supply, many fly by night operators appeared on the stage and
indulged speculative and artificial price spiral, which resulted in crash of
real estate market in later half of 1990.
But now the market has regained its potential. Only serious vendors and end-users
are operating in the market.
The yield in the
realty market has to be calculated on the capital invested and annual rental
returns less property tax, income tax and annual maintenance charges. This
return varies according to the type of property, residential commercial office
space. In Bangalore the returns are about 8% for residential, 12% for office
space and 15% for commercial space. They are certain determining factors, which
play a crucial part in property investment.
Where to invest? In
other words the location. There is equal demand for all types of space in
metropolitan cities and market trends rates are more transparent on account of
competition and frequency of deals. But smaller towns have potential of
increased returns because of dearth of space.
Local politics also plays its role in determining the returns in small
towns.
Amount of
investment: Investment in real estate needs higher
amount and the minimum entry level will be in multiples of lakhs about 15 lakhs
for residential and more for office and commercial space.
Time factor: The
sale of property requires long time for finding a suitable purchaser and
complying with legal requirements, further the appreciation of capital value of
the land is slow but certain and stable unlike in stocks and debentures.
Statutes Local
Laws: The realty investment calls for more discretion and involves
complicated process like title verification, land use according to local laws,
floor area ratio restriction on sale for some period and many more unexpected laws, rules depending upon the political environment.
Tax factor: Uncertain
tax rules, rates which vary every year need to be considered. Property tax is
an annual commitment which is being increased every year by self-assessment or
capital based assessment. Rental income
also attracts income tax to be paid annually; sale of the property attracts
capital gains and purchase invites stamp duty and registration charges,
property tax & stamp duty varies from state to state.
Type of property :
As stated earlier the type of the property is also very important. It may be residential, commercial or office
space. The demand and supply position of each sector needs to be carefully
examined. Residential property calls for
smaller investment. Commercial and
office space need higher investment
Type of returns:
Real estate sector
offers two types of returns: Recurring is monthly
return in the form of rentals, or the returns on the lease amount invested
bank, securities or in business. The other type is return on sale of the property. The amount to be invested also
depends on the mode of returns expected.
Generally leasing of property is attractive only for business
people. Lease amount does not attract
interest. Commercial property and office
space yield high returns to the extent of 15% where as the residential property
yield about 8%.
Risk Factor and
Limitations of Legal Scrutiny: Tracing the title of
property is most important step in purchasing the property which has to be done
by an advocate well versed in property laws and well experienced. The property laws are very complex and varies
from state to state. Further many times,
age-old records need to be examined, which may not be available with the
parties or even in jurisdictional offices.
Further legal scrutiny is based on the documents produced for
verification. However, it is not the duty of the advocate to certify the
genuineness of the documents from concerned departments. The honesty and
integrity of the seller is very important. Certain hidden facts like pending
cases, prior agreements, government notification of the property cannot be traced
easily by verification of the documents. However, paper notification about
purchase of property would help to unearth some claims.
Liquidity:
Investment in real estate cannot be immediately converted to cash unlike
stocks, deposits. However the property is most sought security for bank loans
and rents may be securitized by obtaining loans from the Banks. Maintenance
charges: Property needs periodical maintenance, which involves considerable
amount.
Landlord Tenancy
problem: Most of Indian laws are pro tenant offering maximum protection to
tenants but gradually they are being amended to strike fine balance. But even now it takes much time to evict a
tenant who has defaulted in payment of rents or who has violated the terms of
agreement.
Political Environment:
Government
has maximum control of real estate sector. Sale or purchase of agricultural
land has many restrictions in Karnataka. Land use restrictions exist in many
towns. The major source of revenue to the Government is from the immovable
properties in the form of stamp duty and property tax. In case of acquisition
by the government the compensation paid is very much less than the market
value.
Price cycle: It
has been observed that the real estate has regular ups and downs where the
prices go on increasing for some period and slide downwards for time. But this cycle is long-term trend. Though the
investment is huge, the investors needs to be patient to have good returns
which takes long time. It would be suicidal
to expect appreciation in short run. Two components, the building and land move
in opposite directions, the building value gets depreciated and land value gets
appreciated.
Other factors: Some
factors remotely linked to this sector plays crucial part/role in determining
the price. Introduction of one-way traffic construction of flyovers near the
property decreases the value of the property.
Vaastu nowadays has become important. Another area of concern in want of
information in property market. The
available information is too insufficient often contrasting. Even the
transactions recorded in registrar’s office will not reveal the real price of
the property as amounts other than what is mentioned in the documents might
have involved.
Rental Income: The
rental income from the properties is in the range of 0.5% to 1% p.m. on the
investment.Apart from this income, the value of the property appreciates
regularly.Whereas in case of bank deposits, the value of the money deposited
gets eroded on account of inflation.The
investment in agriculture properties and farm houses are not remunerative. The
income from the Agricultural property, is seasonal and depends on weather and
climatic conditions. Further, the sale of the Agricultural properties has many
restrictions. The farm house demands good maintenance which proves costly as at
many times the income may not match the maintenance charges. The investment in
real estate, is a better option.
The
real estate is only sector which yield better returns apart from capital
appreciation, provided the investor is prudent and have taken enough
precautions.
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