Is Real Estate a good investment proposition?

Why is real estate such an important investment avenue? Why should it form a part of every individual’s portfolio? Rajesh Kulkarni attempts to provide the answers while taking a closer look at the investment potential of this asset class that is among the most trusted by domestic investors.

Gold, property and bank fixed deposits have traditionally been the preferred options for a large majority of Indians looking for a relatively safe, risk-free destination to invest their hard-earned savings.

However none of these are without their share of risks and pitfalls. While the price of the precious metal, of which Indians are said to be the world’s largest consumers, is prone to price fluctuations based on global cues, individual investments into real estate are also subject to market indicators and the overall economic scenario.

Bank deposits, on the other hand are the preferred option of ultra-cautious investors and though a very safe bet, they are not known to set the cash registers ringing in terms of the returns they bring in.

So what is it exactly that makes real estate such an important investment destination for Indians? What are the reasons that justify it being an integral part of your investment portfolio?

Demystifying Realty Investments:
For starters, investing into property has not been a new phenomenon but an age-old tradition among Indians. There have been several instances where land parcels and flats in old buildings that were purchased for a few thousands way back in the sixties (and even earlier), being sold for a king’s ransom in recent years.

Typically Indians are known to make their realty investments into under-construction projects, mainly because the initial prices are low, while the prices are expected to increase manifold on project completion signaling handsome returns to the investor.

While this may sound as a sound investment decision, investments into under-construction or pre-launch projects though ‘cheaper’ are fraught with risks. Among the most common are those associated with project delays, a frequent culprit that is known to infect projects for a variety of reasons ranging from bad market conditions to a builder simply running out of funds to complete the project.

This is not to say that investments in such projects need to be avoided altogether. Investments in this category, for projects being developing by leading A-list developers with a track record of projects completed on time are usually a safe bet.

However investors need to be aware of the risks involved and do their due diligence in terms of verifying the builder’s credentials, track record of past projects, project location, legal status, pending approvals and clearances and expected RoI, prior to handing over the cheque.

Another important factor to be considered prior to investing into real estate is the time factor. Unlike the stock market where shrewd investments can virtually double in no time, investments into realty usually take time to mature and give appreciable returns to the investor.

Unlike the stock market, realty prices are not usually flashed on large screens on a daily basis, thereby pre-empting panic reactions when they drop and also ensuring the investor is unable to make a fast buck in case of a sudden rise, since a flat or a plot of land cannot be simply sold over-the-counter.

Clearly it’s not an avenue for those looking to become overnight billionaires. Again it’s the builder’s reputation, location, amenities & facilities on offer, accessibility, social infrastructure and overall market situation that are some the key factors responsible for price appreciation and the quantum of increase.

Contrary to popular belief, exiting a realty asset once it has appreciated in value is also not a very easy task, at least for first-time investors, which is a primary reason why some property investments stay with the same investor for extended durations of time. On the flip side however, it’s a blessing in disguise since they continue to grow in terms of their capital and rental value.

Preferred Investment Destinations:
According to industry surveys, cities like Bengaluru, Mumbai, Pune, Delhi & NCR and Chennai ruled the roost, as the leading investment destinations for real estate in 2014.

Bengaluru: Whitefield, the fast developing suburban IT hub of the city has emerged as a top destination, courtesy its resident Export Promotion Industrial Park (EPIP), improved connectivity and growing social infrastructure facilities. The area has seen a drastic increase in the demand from property investors due to the rising income levels, pointing to a further rise in property prices.

Mumbai: India’s financial nerve-center has witnessed a rise in the realty fortunes of key areas like Kalyan, Navi Mumbai, Charkop, Thane, Andheri, Mulund and Chembur. Others in the Navi Mumbai belt like Kharghar, Panvel, Palm Beach Road, Ulwe, and Kalamboli are some of the emerging investment destinations popular with investors due to their proximity to Mumbai and improved connectivity.

Pune: Its rise as an IT hub has coincided with the rise of several of its IT/ITES suburbs as popular investment destinations. Areas like Kalyani Nagar, Aundh, Wakad, Hinjewadi, Baner, Wagholi, Charoli, Pimple Nilakh, and Viman Nagar are all riding the demand wave facilitated by the high disposable incomes generated by the city’s growing IT pool.


Delhi-NCR: Here the list is headed by Noida Extension and Dwaraka Expressway which have emerged as the most promising destinations in this region. Property prices at Noida Extension for example are likely to soar an estimated 111 percent during the period 2012-17.  The area already hosts approx 80,000 residential units since 2010. The area adjoining Dwaraka expressway is seen as a good investment opportunity for both residential and commercial units, mainly due the improved connectivity between Gurgaon and Delhi NCR.

Chennai: Areas like Great Southern Trunk Road (GST Road), OMR (Old Mahabalipuram Road) and ECR (East Coast Road) are among the fastest growing here, triggering the rise of nearby locations of Pallikarani, Medavakkam, Chrompet, Tambaram, Thoraipakkam and Sholinganallur.  Upcoming areas like Keelkattalai, Pallikarani, Medavakkam, Chitlapakkam and Selaiyur are also likely to see rapid growth in the near future.

Time To Invest Is Now:
According to experts, with most developers under pressure to offload unsold inventory due to the ongoing market slowdown, it’s an opportune time to make long-term investments into the real estate space. With the central government announcing its intention to focus on urban development with ambitious programmes such as building 200 Smart cities across the country and several policy initiatives to encourage FDI into the sector, the future look good and property prices may go up in the mid-to-long term they add.

Global realty investors have already evinced a more than casual interest in investing in Indian real estate, with a recent Cushman Wakefield report ranking India among the top realty investment destinations for foreign investors, with the third highest growth in terms of investment volume pegged in excess of 140 percent @US$5bn last year, the highest level of foreign investments into realty in the last five years. A stupendous achievement that has hurled India into the Top Twenty highest priority investment markets for 2014.
 
With an estimated 600mn people likely to be living in our cities by 2030, the demand for homes is expected to see a sharp increase in the coming years. Added to this, the introduction of REITs, improved market sentiment and concerted ongoing efforts by the government to reduce project loopholes and transaction delays are some of the positives for the real estate sector and food for thought for potential investors contemplating the plunge.