Real Estate is a Long- Term Investment; Proceed Cautiously - Quick Checklist

Ms. Binaifer Jehani,  CRISIL Research

An investment in real estate should not be a casual decision. It is a long-term investment and requires a lot of careful thought. You need to consider a lot of basic parameters before jumping in to buy and at the same time if you want to sell, you have to do all due diligence first.

Investment in real estate is not the same as buying a property for consumption; in case of the latter it does not matter whether the price point is attractive or not rather the entire package should suit your needs from the lifestyle perspective.

But, if you are buying it as an investment, you need to consider some additional factors.

Quick checklist

 

Binaifer Jehani, CRISIL Research

Here is a quick checklist of what some of the important considerations should be.

Ensure adequate funds: If you are taking a loan, most lending institutions typically fund only 75-80% of the total property value and insist that buyers arrange the balance amount from personal funds.

In the current scenario, property buyers must ideally ensure they have savings amounting to at least 40 % to 45 % of the property value (Nearly 25 % for upfront payment and an additional cushion of 15% to 20 % to tackle sudden contingencies like medical crisis).

Moreover, it is preferable to apply for a bank loan as the lender will be able to check the finer points related to the project (legal clearances, no-objection issues & land ownership) which buyers might overlook.

Spot the “right” spot: This is an extremely crucial factor. Buyers need to look at the overall development of the area where the project is situated with respect to livability (residential enclaves in the vicinity) & proximity to commercial spaces (offices, malls & high-street retail).

It is also essential to check availability of transport facilities & social infrastructure (schools, hospitals & hotels) before making the final decision. Location can also influence the final returns depending on the micro market.

Across the 92 micro markets that CRISIL Research tracks, while the average return over the past eight years has been 11 % to 12 %, nearly 15 micro markets have fetched annualized returns of above 15 % but 11 locations have offered returns of 5 % or /  less annualized returns.

Background check on the project / or developer:

Before zeroing in on the final project, buyers need to check the developer’s track record with respect to timeliness of delivery of past projects. Buyers need to check if all the necessary clearances for the project plan approvals from municipal authorities & commencement certificates have been obtained by the developer or / not.

In light of the recent announcements made by the Reserve Bank of India (SBI), buyers must also examine the terms & conditions in case of 20 : 80 and similar schemes.

Apart from that construction quality, amenities offered & annual maintenance charges should also be checked. Buyers must also be aware and prepared for any delays in execution, especially in projects where construction work has not yet commenced.

This was as far as narrowing down and buying the property is concerned. Now comes the second leg of an investment - selling.

Real estate investors must be prepared for a long haul and be ready to have an investment horizon of 7 years to 10 years. It is not ideal to chase short-term returns and end up selling a property in panic as the transaction cost is very high.

Barring a short blip in 2008-09 (following the global economic crisis), the pan-India index of house prices witnessed a steady rise.  However, making a quick gain in the real estate market is only illusory. While one hears about instances of multi-baggers, in reality on average house prices across top ten cities have grown at a more sedate pace of 11% to 12 % annually between 2005 and 2012.

However, the extent of appreciation has varied across cities. For example, Hyderabad is a notable exception. The city’s real estate market never really picked up after the 2008-09 global economic crisis as tensions surrounding the formation of Telangana affected buyer sentiment negatively.

At the time of buying, you should know that this is not an asset for “instant cash” or in other words it is quite illiquid. Do not invest all your savings into property. Sale of a property could take at least two months. Further, there are guidelines on reinvestment in order to mitigate the tax outgo which you will have to adhere to.

Also, you will have to pay taxes on capital gains thus denting net returns.

Caution is the keyword for real estate investors in India.

 A little patience will ensure steady returns and a thorough check on developer/project will keep the investment secure.

About the author

Ms. Binaifer Jehani is director at Crisil Research.

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