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 his old
age. This naturally makes him save some portion of his 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 his hard earned money.
Investment avenues are many. But, the Investor should be
prudent enough to select a proper area, which is safe and secure, with assured
reasonable returns. Earlier, the Bank deposits, stocks, mutual fund, insurance
policies and bullion were most opted. With increased business, globalisation of
economy has unfolded many more areas. The investment has become very complex
which has led to the emergence of specialised investment Advisers.
Bank deposits, insurance policies and 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 a considerable amount. It is not only financial, but also
a sentimental and emotional investment.
The liberalisation initiated by the Government has opened
up the hitherto dormant Indian economy and many Multi-National Companies have set
up their offices in major metros. The improved pay packets of vast middle class
population have opened many investment routes. The desire to own a roof over
their head as early as possible and the migration of rural people to urban
centres in search of assured income jobs has further expanded the real estate
market.
However, as the demand exceeded supply, many fly by night
operators appeared on the stage and indulged in speculation and an artificial
price spiral, which resulted in crash of real estate market in latter half of
1990. But now, the market has regained its potential. Only serious Vendors and
Endorsers are operating in the market.
The yield in the realty market has to be calculated on the
capital invested and the annual rental returns less property tax, income tax
and annual maintenance charges. This return varies according to the type of
property i.e., residential, commercial or office space. In Bangalore, the
returns are about 8% for residential, 12% for office space and for commercial
space 12 %. There are certain determining factors, which play a crucial part in
the property investment.
Where to invest? In other words it is location. There is
equal demand for all types of space in metropolitan cities and market trends
are more transparent on an account of competition and frequency of dealings.
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.
Huge Investment:
Investment in real estate needs higher amount and the minimum entry level
will be in multiples of lakhs, it would be about Rs. 20 lakhs for residential
and much more for office and commercial space.
Time factor:
The sale of property requires long time for
finding a suitable Purchaser and for complying with the legal requirements.
Further, the appreciation of capital value of the land is slow but, will be certain
and stable unlike in stocks and shares.
The realty investment calls for more
discretion and involves complicated processes like title verification,
land use according to Local Laws, Floor Area
Ratio (FAR), restriction on sale for some period and many more Laws and rules
depending upon the political environment.
Tax factor:
Uncertain tax rules and rates which vary every year need to
be considered. Property tax is an annual commitment, in which it is being
increased every year by self-assessment or capital based assessment. Rental
income also attracts income tax to be paid annually; sale of 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 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. Residentialproperty calls for smaller investment. Commercial and office space needs higher
investment.
Type of returns:
Real estate sector offers two types of returns namely:
(i)
Monthly return in the
form of rentals and the returns on the lease amount invested in the Bank
securities or in business and
(ii) The other type
is the sale consideration 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%
whereas the residential property yield is about 8%.
Risk Factor and Limitations of Legal Scrutiny:
Tracing the title of the property is the most important
step in purchasing the property, which has to be done by an Experienced
Advocate who is well-versed in Property Laws. Property Laws are very complex
and vary from State to State. Further, many times the age-old records needs to
be examined which may not be available with the parties or even in the Jurisdictional
Sub-Registrar's Offices. Further, Legal Scrutiny is based on the documents that
will be produced for the verification. However, it is not the duty of the Advocate
to certify the genuineness of the documents from the concerned departments.
Honesty and integrity of the Seller is very important. Certain hidden facts
like pending cases, prior agreements and 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
into cash unlike stocks, deposits. However, the property is most sought after
security for Bank loans and rents may be securitised by obtaining loans from
the Banks.
Maintenance charges:
Property needs periodical maintenance, which involves a
considerable amount.
Landlord Tenancy problem:
Most of Indian Laws are pro tenant offering maximum
protection to the tenants. But, gradually they are being amended to strike a
fine balance and 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 on 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 much lesser 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 down for
some time. But, this cycle is a long-term trend. Though the investment is huge,
the Investor needs to be in patience to have a good return which takes a long
time. It would be suicidal to expect appreciation in short run. Two components,
the building and the land move in opposite directions, the building value gets
depreciated and the land value gets appreciated.
Other factors:
Some factors are remotely linked to this sector and play a
crucial role in determining the price. Introduction of one-way traffic and
construction of flyovers near the property decreases the value of the property.
Vaastu, nowadays, has become important. Another area of concern is want of
information in the property market. The available information is too
insufficient and often contrasting. Even the transactions recorded in Registrar's
Office will not reveal the real price of the property as the amount other than
what is mentioned in the document might have been paid.
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 the case of Bank deposits, the value
of the money deposited gets eroded on account of inflation. The investment in
agricultural properties and farm houses are not remunerative. The income from
the agricultural property is seasonal and depends upon the weather and climatic
conditions. Further, the sale of agricultural properties has many restrictions.
The farm house demands good maintenance which proves costly and many times the
income from there may not even meet the maintenance charge. The investment in
real estate is a better option.
Real estate is the only sector which yields better returns
apart from capital appreciation provided the Investor is prudent and has taken necessary
precautions.
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