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 save some portion of his earnings and
invest them 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 funds 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 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 a financial but also a
sentimental, emotional investment.
The liberalisation 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 packets of vast middle class
population has 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 estatemarket.
However, as the demand exceeded
supply, many fly by night operators appeared on the stage and indulged in a
speculative and artificial price spiral, which resulted in crash of real estate
market in later half of 1990’s. 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
There 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 and 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 a
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, debentures.
Local Laws:
The realty investment calls for
more discretion and involves complicated processes 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 needs 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 return:
Real estate sector offers two
types of return:
Recurring is a monthly return in
the form of rentals, or the returns on the lease amount invested in 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 & limitations of legal scrutiny:
Tracing the title of property is
most important step in purchasing the property which has to be done by an
experienced advocate who is well versed in property laws. The property laws are
very complex and vary 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 etc., However, the
property is most sought security for bank loans and rents may be securitised 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 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 less than the market value.
Price cycle
It has been observed that real
estate has regular ups and downs where the prices go on increasing for some
period and slide downwards for some time.
But this cycle is a 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 trun. 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 play a crucial part 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
is want of information in 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 amounts
other than what is mentioned in the documents might have been 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.
Real estate is the only sector
which yields better returns apart from capital appreciation, provided the
investor is prudent and has taken enough precautions.
No comments:
Post a Comment