Risks in Property Investments

Most people wish they had bought a home sooner or invested in a piece of land. Lately however the charm of property investments is waning due to three main reasons – low returns, illiquidity and completion risks. But the time tested rule in investing is that profits are made by being greedy when others are fearful. Property investors can make handsome gains amidst the current negative sentiments, if they know how to mitigate the risks.

Lowering delivery risks
Poor delivery track record and developer problems are risks that keep buyers from entering the market. In certain geographies such as the National Capital Region, delivery deadlines have been missed by over three years in many projects. Change in project specification, cost escalations and quality issues are other problems buyers had to deal with. These make buying a home, especially one that is under-construction, a risky proposition for many.

That said, the risks can be mitigated with due diligence and rating of developers. You must look at the developer’s credentials for on-time delivery, quality standards and process, customer satisfaction and financial strength to determine the likelihood of on-time delivery to the specifications given. Experts can also help you with the evaluation and rating process so that it is objective and based on data.

Liquidity issues
Property investments, due to large ticket size, uniqueness which makes comparison difficult as well as high transaction costs, are typically illiquid. But when there is good demand in the locality, solid developer credentials that makes the project a sought-after one and reasonable price expectation, illiquidity is no more a worry.

For instance, large plots or high priced homes may take a while to sell, but mid-income homes from a good developer in a well connected locality may not pose such problems at the time of selling. These may have a wider base of buyers and may be sold relatively quickly. The homework you do before a purchase – on the neighbourhood, project features; relative pricing of the property; demand and price growth aided by job growth in the area – would ensure that the property is easily saleable at or above market prices.

Ensuring returns
All these factors also contribute to price appreciation and return on your investment. Take the case of social infrastructure development. Schools, hospitals and shopping areas coming up in a place and connectivity improving over time will create demand for the property and lift prices. Job growth is a key driver of property prices and it helps to keep a watch on which companies are moving into the neighbourhood.

Usually good developers do their homework and perform a thorough analysis of these aspects before launching their project. They ensure that there will be enough demand for their project and price appreciation also happens as the development progresses. They also look at the master city development plan of local authorities and tend to be in the know of where expansions are planned and start a project based on this intelligence. You can look at the developer’s track record of location and project feature choices from their earlier projects to assess their skills and success on these aspects.

For sure, property investment, similar to any other asset class, has its share of risks. But risks are an inherent part of the system and gains can be made by knowing them and finding ways to reducing it through knowledge and expertise. This can enable earning profits over the long-term.

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