Should you invest in a tier-2 city property?

Metro cities such as Mumbai, National Capital Region (NCR), Bengaluru and Chennai account for the bulk of property transactions in both residential and commercial space. Larger markets account for three-fourth of all sales in the country. But smaller towns may offer some attractive and niche investment opportunities that differ from what you may get in metros. Investors who are interested in looking beyond big cities must weigh the pros and cons of small town property investments before taking the plunge.

The good
Infrastructure and job growth in smaller towns offer genuine opportunities for investments that many may not be aware of. For example, IT park development in Coimbatore boosted property prices. Likewise creation of industrial corridors may create new pockets of job growth, spurring property demand.

Property ticket sizes also tend to be smaller in tier-2/3 cities. This can make it an attractive choice for many investors who cannot afford to buy a property without a budget in crores. Home prices in prime neighbourhoods such as Banjara Hills in Hyderabad go for Rs 4,000 to 4,500 per sq ft, compared with over Rs 1 crore tag for a home that is under 1,000 sq ft and in an ok locality in Chennai.

Some locations may also offer niche prospects typically not available in cities. For example, a home in a hill-station town or a tourist spot such as Mysore or Goa may offer good income and price growth potential, driven by factors that differ from what helps price appreciation of a home in the suburb. These may be of interest to some investors and may offer good potential for savvy investors.

The bad
That said, the property markets in smaller towns are, well, small! There are not enough transactions and the market depth is low. As a result, liquidity may be poor. Prices may rise fast on low volume and when things turn for the worse, selling may turn out to be a challenge.

Job growth, which drives property prices, may not happen steadily in smaller cities. So the price appreciation or demand growth that one hoped for, may not pan out. This coupled with supply additions from larger projects that were possibly launched add to inventory that may create price pressure. Unlike large cities, even a few mid-sized projects with only add a few hundred homes each may lead to excess supply, as local demand tends to be typically low.

The choice
Small town investments offer different risk-reward profiles and may yield results in short or long term horizon. For example, currently prices in regions such as NCR are on a severe downtrend; but many smaller towns such as Vizag and Indore are witnessing robust market size growth. Sales volume in 19 tier-2 cities fell by 17 per cent in the last two years, half the fall witnessed in the top 14 tier-1 cities (32 per cent fall), as per a report from PropTiger.

When the property market was hot, there was a lot of investor interest in smaller towns. But when the tide turned, small town investors faced more pain than those who bet on metros. The risks tend to be higher as many towns rely on one or two sectors to drive demand. For instance, the change in oil fortunes in the middle-east impacts the property market in towns such as Kochi where there is a lot of money coming in from abroad. So you must assess the specific risk in a region before investing.

If you are from a small town area, you must be extra cautious to not let familiarity bias cloud your decision. You must separate the emotional attachment aspects from investment potential and assess the opportunity objectively. Buy a property only if it meets your goals of returns and time horizon of investment. Do not overlook risks since you have a comfort factors.

Small town properties can be an interesting opportunity to consider for many, but specific risks, growth drivers and local factors have to be evaluated to decide on the investment.

Three use-cases of Property Assets

People buy land or a home not just for their own use but as an investment quite often. In these cases, property is not a consumption purchase and must be seen as a part of a portfolio of assets. When building a portfolio, real estate as an asset class can be a very helpful tool that plays a pivotal role in meeting certain financial goals. Globally, property is an accepted asset class used by financial advisors to meet investment goals of their clients.

Here are three examples of how property investments can be thought of in your portfolio to help you reach certain financial needs.

Education goal

Young parents start to worry about their children’s education early on. The struggle and high fee to get admission to a pre-school makes them wonder about college expenses, given high inflation in education costs. For those with funds available now, buying a property and holding it till the child is ready for college can be one choice to consider for parents.

Land can be a good option to consider as it enables investing a smaller sum as well as a much large sum. You can also buy in smaller quantum and add to the overall portfolio over a few years, as and when you have funds. A home is also an option and rental income can be invested in a systematic investment plan to continue building the corpus towards meeting the education expenses in the future.

Given that property markets go through cycles and selling a property may take time, you can consider selling the property a years ahead of when the funds will be needed. Invest the money in liquid investments such as fixed deposits so that you are assured of having it handy for college admissions.

Retirement income
Property can be a good asset that can provide monthly income during your retirement. This is in spite of rental yields being quite low, only about 2-3 per cent of the property value.

For example, during your working years, you may be in a high tax bracket. You can take a loan for a home that is worth say Rs 30 lakh and avail tax benefits. A second home has no restriction on the amount of interest you can deduct and the expenses you incur on the home can be set off against the tax on rental income.

Say the house price appreciates over the years by say a nominal 5 per cent. In 8 years, you may have repaid the loan (average loan tenure tends to be 8 years) and the house is worth about Rs 45 lakh. At 2 % rental yield on Rs 45 lakh, you earn Rs 7,500 per month. This can cover 10-20% of your monthly expenses which may be in the range of Rs 40,000 to Rs 75,000.

Rents also typically keep pace with inflation. If inflation is 7 % rents would increase to Rs 10,000 in about 4 years and your expenses may be Rs 50,000 to Rs 1 lakh. Rents continue to contribute 10-20% of your monthly expenses. This can be quite helpful especially if other sources of your income – fixed annuities, fixed deposit interests or fixed pension – do not keep pace with inflation.

Asset for business
Property assets can also come in handy if you intend to take some loans in the future. For instance, say you want to start a business a few years down. You can buy a home and pay off the loan while you are earning a salary. When you start a business, this will ensure that you need not have to budget cash flows for your rent. Running a business creates severe cash flow issues as there is no steady income and avoiding one big need for monthly cash can be a great source of relief.

Also, a home is an asset against which you can take loans for your business. It is good collateral, against which many banks and financial institutions lend. The rate of interest on a loan against property, about 12% currently, is also much lower than other personal loans that may be charged over 14%. Unlike gold loan, where the collateral is physically in the possession of the banks you can continue to live in a pledged home and save on rent.

Three mistakes property buyers make

Buying a property is not easy, no matter what agents and real estate advertisements want us to believe. And buyers, especially first time buyers, make umpteen mistakes in the process. Rather than paying a high price for the learning process, a few simple steps can help buyers make a good purchase. The first step to learning is to know what the mistakes are and how to rectify it.

Bad advice
Promotions and opinions disguised as advice is rampant and we tend to go by into it. Imagine this. A medical student tells you a great story on how a complicated heart surgery can be performed. Would you trust him to do it for it? Would you take the advice of your car cleaning person to replace the engine? Hopefully you said no (if you said yes, I have a great scheme designed for gullible people. Please call me!). But we buy on advice from friends and relatives without doing our homework.

Misleading testimonials and anecdotal evidence are rife and often buyers are influenced by the images or promises. They do not dig for the truth as unbiased independent information is not readily available. Free advice is only worth what you pay for it.

So before buying, see advice from trusted sources on developer credentials, neighbourhood intelligence, project features, total all-inclusive costs and legal aspects. Talk with credible folks and seek data and the source of the information and avoid opinion based conclusions or gut feeling alone. The data you must go by should be based on your purpose in buying the asset – is it for a primary residence, rental property or an investment. The parameters you weigh would be different in these cases.

High expectations
Buyers get taken-in by grand visions of development that is projected to unfold and make the locality nothing short of heaven-on-earth. Above all, hope that the property will give double the investment return within a year or even six months, if lucky. Often these expectations are formed by anecdotal evidence from a friend-of-a-friend who made windfall gains with a ‘timely’ investment.

Sadly though, our stars are never that lucky. Investors are disappointed if price appreciates slowly and end-users are frustrated with lack of even basic amenities such as water and drainage even after a few years of moving into a new area. What about the highway project and the IT park development that was going to come up?

The fact is that given the way our governments (don’t) work, it is not wise to bet on immediate sure-fire growth, unless you want to speculate. It helps if you have a realistic assessment of when infrastructure projects may start and complete and the timeframe for the other growth drivers to play out.

Low diligence
Property owners may also get into trouble as they forget the simple warning – buyers beware. Misplaced trust – on intermediaries such as property agents and developers – can lead to a lot of pain. Hurrying into an agreement without thorough checks and not bothering to read the fine print often leads to regretting in leisure.
Legal checks on the property and ensuring the agreement is not one sided may seem like basic things buyers must do, but they often skip these and trust that other buyers would have done it. You can be the one-eyed person who wants to verify everything when others are being blindly trusting. Do not be naïve, it is ok to dig deep, ask a lot of questions to assure yourself that there are no legal issues in the purchase.

Knowing the common but critical mistakes in property purchase can make you aware of what you need to do and gain knowledge to do the right things. Property purchases are big ticket buys and it pays to be sure and not take any short-cuts.

The Psychology behind Property Investments

In a world of multiple investment choices, ever wonder why the old asset class of property continues to be a popular choice globally? The answer may lie in the nature of property as an asset class and psychology of investors.

The problems in property assets are well known – illiquidity, lack of information, high transaction costs – to name a few. These may well be the reasons that make it a good choice in the eyes of many. Property is easier to hold over the long-term because of how the human mind works.

Long-term value
If you look at the key secret that successful investors such as Warren Buffet share, it is quite simple – do not be carried away by short term sentiments. One must keep their eye on the long-term intrinsic value and ignore the cyclical fluctuations that kindle fear or greed in our mind.

This overarchingly simple lesson is however difficult to follow. Humans are, by nature, short-term focused, possibly being trained from pre-historic times to worry about the next meal and not far beyond. The immediate pain also usually over-rides considerations of future benefits.

To illustrate, consider you have a corpus of Rs 50 lakh and you buy stocks for Rs 50,000 (1% of your funds). The stock loses 20% in a short period, setting you back by Rs 10,000. When the stock price rebounds and your portfolio is worth Rs 50,000, it is likely that you are tempted to close your position. The loss aversion feeling is more acute if the investment amount is a larger share of your total portfolio or the dip was higher than 20 per cent or the period of paper-loss was longer. Just seeing the portfolio in the red day after day makes you want to avoid this pain. And in the process we may forget the long-term value of holding-on.

Curse of liquidity
Liquidity is generally a benefit in investments as you can exit a position quickly. Investments such as stocks and mutual funds have their prices updated daily as it is traded actively in the market. This constant price movement can also be a source of discomfort due to information availability.

Seasoned investors are able to ignore the manic-depressive tendencies of the market and focus on long-term value. But many of us are not blessed with such intelligence-filters and hence worry about volatility.

Less is more
One way to avoid over-reactions is to not check portfolio value often. Property markets interestingly offer this filter automatically. Prices are not flashed across our screens all day long. Price data is available based on transactions and is made available maybe only every quarter or so. Also each property is unique and the quoted price may not be indicative of the price for your specific property. For example, the rate per sq ft in a locality would be different between projects based on amenities, in the same project depending on the size, location and customizations.

Selling a property is also not instantaneous. Finding the price, a buyer and going through the process involves time and some amount of effort. And if the market is soft, there may be even more delays and price discovery may be an iterative process.

While the lack of price discovery and possible illiquidity is a problem for efficient market operation in general, it has its benefits. One, owners do not panic as much and get in and out of investments. Two, property is out of sight and hence tends to be out of your mind. Three, even if a price is given, due to the uniqueness of each property, investors are able to filter out information as it may not be indicative of what they would get. These help them to hold on, while the same investor may have sold out of stocks or bonds.

To build wealth, investors have to create a portfolio with many asset classes. The assets must have different risk, return and time horizon characteristics. And property investments differ from stocks and bonds and other alternate assets such as gold, making it an important tool in diversification and long-term wealth creation.

Credibility Cycling

Let’s understand the science behind the cycling first, to
1. Two wheels
2. One frame
3. Connectivity and
4. A cyclist –the driver who rides it .
The modern bicycle, complete with a steel frame, a chain drive, steel wheels, spokes, and pneumatic tires. We’ve described a bicycle as a “machine” and, in scientific terms, that’s exactly what it is: a device that can magnify force (making it easier to go uphill) or speed.

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The frame
The frame doesn’t simply support you: its triangular shape (often two triangles joined together to make a diamond) is carefully designed to distribute your weight. Although the saddle is positioned much nearer to the back wheel, you lean forward to hold the handlebars. The angled bars in the frame are designed to share your weight more or less evenly between the front and back wheels. If you think about it, that’s really important. If all your weight acted over the back wheel, and you tried to pedal uphill, you’d tip backwards; similarly, if there were too much weight on the front wheel, you’d go head over heels every time you went downhill!
Frames aren’t designed to be 100 percent rigid: that would make for a much less comfortable ride. Virtually all bike frames flex and bend a little so they absorb some of the shocks of riding, though other factors (like the saddle and tires) have much more effect on ride comfort.
The wheels
The wheel is the most crucial element of the bicycle: it allows the rider to roll over the ground with great speed and efficiency.Dragging a load using a wheeled cart is far easier than dragging it on the ground—for two reasons:
Wheels reduce friction. Instead of simply sliding over the ground, the wheels dig in and rotate, turning around sturdy rods called axles.
Wheels provide leverage in other words, they are examples of force multipliers or simple machines.
The energy
It takes less energy to bicycle one mile than it takes to walk a mile. In fact, a bicycle can be up to 5 times more efficient than walking. If we compare the amount of calories burned in bicycling to the number of calories an automobile burns, the difference is astounding. One hundred calories can power a cyclist for three miles, but it would only power a car 280 feet (85 meters)!

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A comparison of the energy cost of various forms of transportation shows that the bicycle is most energy-efficient.
It’s a machine, a system , a process in the sense that it converts energy from one form (whatever you had to eat) into another (the kinetic energy your body and bicycle have as they speed along).
Now you’ve probably heard of a law of physics called the conservation of energy, which says that you can’t create energy out of thin air or make it vanish without trace: all you can do is convert it from one from to another. So where does the energy you use in cycling actually go? It scientific terms, we say it goes into “doing work”.
The coolest thing about a bicycle is that it lets you get where you are going a lot faster and using a lot less energy than if you were walking or running.
“Penny-farthing” Victorian bicycle Vs Bicycle
You have probably seen a picture of the funny-looking “penny-farthing” or “high-wheeler” bicycles — the ones with a huge front wheel and a tiny rear wheel. You might even have seen someone riding one in a parade or in a movie. These bicycles became popular starting in 1870, but by the turn of the century were replaced by the “safety bicycle.” A bicycle from 1900 or 1910 looks almost exactly like any bicycle you see today. Today’s bicycles have two wheels of the same reasonable size, a pair of pedals in the middle of the bike and then a chain that connects the pedals to the rear wheel.
In a penny-farthing bicycle, the pedals and the front wheel are directly connected just like they are on a kid’s tricycle. That means that when you turn the pedals one time, the wheel goes around one time. That’s an inexpensive way to build a bicycle, but it has a problem. Think about a kid’s tricycle. The front wheel might be 16 inches (40 cm) in diameter, or 16 * 3.14 = 50 inches (127 cm) in circumference. That means that each time a kid on a tricycle pedals through one revolution of the front wheel, the tricycle moves forward 50 inches (127 cm). Let’s say that the kid is turning the front wheel at 60 rpm, or one revolution per second. That means that the tricycle is moving forward 50 inches per second. That is only 2.8 miles per hour (4.5 kph). If the kid pedals twice as fast, at 120 rpm, the trike is moving at just over 5 miles per hour (9 kph), and the kid looks like his legs are about to spin off because 120 rpm is a lot of pedaling!

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Our objective is to help the developer community to create a bicycle approach in related to the credibility and make sure that they move faster with the energy. Most of the time currently the developers end up in creating the penny farthing approach.
Every real estate developer has to achieve two wheels first,
1. Developer credibility
2. Project brand identity

In the current scenario the developers also create these wheels but what they do is the penny farthing approach on this. They create their brand identity bigger than the project brand visibility and some time the project credibility is bigger than their own organisation and brand credibility. The difference in the wheel sizes even the energy is applied will not deliver the result as required and the developer have to keep on pedalling consistently with more efforts like riding the penny farthing.
As in the case of penny farthing the developer keep pedalling the front wheel which is the project brand identity than their credibility , that means every time they put efforts only then they see the result where their credibility of the brand never gives them any result its only the project brand identity which is giving them result. This is working on the pull mechanism. This not only becomes more costly affair but also the most time consuming affair.
We understand that only changing the sizes of wheels will not solve this there is a need to change the framework, the approach towards the cycling from the front wheel to real wheel cycling, instead of the pull to push mechanism, need to build in gears to make it safer faster and also more energy efficient.

To achieve the credibility cycling there are some of the attributes which are very crucial than the equal size wheels,
1. Balanced framework
2. Right connectivity
3. Energetic driving force

Our objectivity is to get the maximum output reach with minimum efforts and also to optimise the credibility of the developer established than just creating more visibility of brand for the development project and also to build credibility out of the brand equity that have been created out for the project through a balanced framework like that of a cycle to achieve the maximum output based on the aerodynamics , the scientific approach , here we are taking marketing science approach based on the consumer behaviour .

It’s not necessary that every time the brand identity is needed for the project under development, the credibility established by the developer on the brand can play an important role by the right connectivity, through various approaches of building trust and transparency with the potential new customer. In most of the scenarios reference of existing happy customers, visibility of the satisfied communities that have been created, identity of the landmarks built become the right connecting chord to strike relationship with a potential customer without even the brand identity of the new development. It’s the push of the real wheel, well established credibility making the new project identity actually like the case of bicycle.

One of the beautiful aspects of the cycling is on the momentum of ride it doubles not only the rider’s energy it helps to reach the destination faster and also it delivers double the result for the energy applied by the way of aerodynamics involved . this applies in the credibility cycling, when the established credibility of the developer is far more greater and keeps on accumulating on every project that is delivered, every brand identity of the project is established it multiplies with multiplier effect and delivers better results to the developer brand as well the project in the form of pricing premium, product demand and post buying satisfaction.

To make every development successfully, Most of the time the challenge is achievement both simultaneously and carrying forward towards the next development as well as the growth. But at the same time it’s very crucial and necessary for the every developer to achieve this, consistent balanced pedalling with the right connectivity for achievement the momentum on every project that is launched and every geography entered. We help the developer to build this, achieve this through a systematic approach of applied science with facts and figures.

The many perils in Land Investment

Land as an investment option is quite popular. One reason is that it can fit a wide range of budgets. A small plot in tier 2/3 cities or in the suburbs can be suitable for someone with a small budget of under Rs 20 lakhs. Large tract of land or plots in prime locations can be bought for budgets of Rs 1 crore or more.

Another reason is the appreciation potential. Buildings lose value over time as it tends to depreciates. But land retains value and price appreciates as it is a limited resource. Anecdotal evidence shows that land prices have appreciated at double digit rates annually in the last three decades or so.

But while the high returns and investment size may be attractive, land investments come with many risks. One, a good deal of legal due diligence has to be conducted on land. There may be issues in ownership, access and approvals. So the investor has to tread with caution to avoid the various legal traps.

Two, land may be taken over by the government for infrastructure projects. Land investments may be in less developed areas and road projects or industrial areas may come up in these locations. The new land acquisition Bill requires paying two-four times the circle rate for the land taken up, but it is often the case that the land owner has paid over the prevailing rates and may not enjoy price gains. Not just that, the payment process may face inordinate delays due to issues raised by other land owners.

Related to this is the issue of land encroachments. As land tends to be in undeveloped areas, it must be well secured with a fence and visited upon often to avoid someone claiming ownership. The owner has to go through long legal process and suffer stress when their land is encroached upon.

Three, there are also price appreciation risks. For example, while the land may have been bought on hopes of certain infrastructure coming up, it may not happen, as government development plans may change; this can dampen returns. Also, when development talks happen there tends to be rampant speculation, which boosts land prices in the short term. When things return to normal, there may be price corrections if there is over supply. We see this when talks of the new capital city’s location was in the process of being finalised in Telengana. Prices shot up and then crash landed.

So it is important to understand the many risks in land as an asset class. The high returns come with unique risks depending on the location and the investor must be knowledgeable to evaluate them. While the success stories of land price doubling may be tempting, it is best not be carried away; it is best to only enter an investment after knowing the flip side and the probability of negative developments.

Else, you can consider other alternatives. Property backed financial instruments may be one option to provide liquidity and reduce risks. Returns can also be enhanced as experts are involved in managing the operations. Investments can be in small or large sizes, providing some of the benefits of investment such as land while also lowering risks.

What the rich think about Property Investments ?

It helps to ask a physically fit person on their secrets for staying in shape. Likewise we can look to the rich on how they invest and their views on various asset classes. And it turns out that the wealthy of the world love to invest in property.

Data from real estate research and advisory firm Knight Frank shows that High Networth Individuals (HNIs) globally have a fourth of their wealth invested in their primary residence and secondary homes. They have an additional 10 per cent of their wealth in real estate investments. The investments in real estate sector are overall higher than their investments in equities and bonds.

Private investments in commercial investments are also on an uptrend in the last five years. The amount of investments increased from $54 billion in 2009 to $178 billion in 2015, showing growing interest of HNIs in commercial properties such as office and retail space.

The trend of higher allocation to real estate by HNIs is not new. Over the last decade, 54 per cent of wealth managers said that their clients had increased their allocation to residential property. Nor is this upbeat trend for real estate likely to change anytime soon. About 47 per cent of the respondents said they will increase their allocation to real estate investments in the next ten years. Contrast this with the falling popularity of other ‘real’ assets that have low correlation with the stock market – precious metals. Over 40 per cent of HNIs are likely to decrease their investments in precious metals and only 14 per cent are likely to increase it.

So clearly among non financial assets, property is winning out. But what is the attraction of real estate? About 55 per cent of the ultra rich buy residential property as an investment, something they will sell in the future. It is also seen by half of the rich as a way to diversify investments and also as a safe haven for funds. As part of diversification, there is also an interest in making investments outside their country. The amount of investments into India for instance increased 420 per cent between 2005 and 2014 to $270 billion. In the same period, investments by Indians outside the country increased 738 per cent to $132 billion. Likewise investments out of China increased from a mere $64 billion in 2005 to $1,013 billion in 2015.

What may be some takeaways for property investors? One, property investments – be it in homes or through financial instruments – play an important role in one’s portfolio. And with global opportunities available now, it helps to expand beyond one’s local neighbourhood for value creation, risk reduction and income generation. For example, Vancouver, Canada witnessed 24 per cent increase in property prices in 2015, while Dubai witnessed a 5.5 per cent dip. Diversifying across geographies helps reduce risk and invest in markets where there is value creation.

Two, diversification is important as there are no permanent winners in property markets and preferences switch from time to time. Developed economies were preferred for a period and it moved to emerging economies and now with growth back in the US, the interest is shifting back. Among cities we find there are periods of price appreciation in one market versus other and it helps to either engage with an expert to take the right bet or to spread the investment.

Pick the right vehicle to reach your goal

Pick the right vehicle to reach your goal

Our financial goals can be thought of as destinations we want to reach. And various financial investment choices in different asset classes can be thought of as vehicles to get us there.

For example, say you are in Mumbai and want to go to Pune. Taking a taxi, a Volvo or a non a/c bus, train and driving down are some options available. What you pick as your travel choose depends on your budget, how fast you want to get there, your limitations such as motion sickness and preferences on departure time.

Now imagine your destination is Delhi. Driving may not be a viable choice in this case but flying is an additional option to consider. But if you have fear of flying, you have to pick among other available options, even if airline tickets are on sale.

If your neighbour or friend hops onto a taxi, as he wants to go to Pune or tells you how great his cab ride was, you would not take a taxi if you want to go to Delhi. That is because you know that what works for a short distance travel is not applicable for a long distance destination. Likewise, you will consider the season – too hot, rainy, etc – to weigh whether what worked for someone else will be suitable for you.

Unfortunately though, we don’t exercise such judgement when it comes to investments. For instance, we fail to understand our risk tolerance for a given return expectation. Is the small-cap stock investment really for us given it can lose over half its value when market turns?

We also don’t look at asset classes such as equity, bond and real estate as vehicles to reach a goal in a certain time period. We need to understand the expenses (risks) and benefits (returns) and also take into account our preferences (risk tolerance, knowledge) of various investment choices before signing up. This will help reduce the chance of landing at an unexpected destination or having a bumpy ride.

When we start to do that, we realize that each asset class has certain positives and drawbacks. We also understand that we have certain inherent preferences and limitations and we cannot blindly take someone else’s advise fully, no matter how well intentioned it is. We can discern the differences between short-term and long-term investment vehicles and how to compare and evaluate them.

For instance, short term investments must be liquid as you want to cash out quickly. The same need not be the case for long term investments where waiting for some time may not be an issue. Short term investments must be quick to evaluate whereas spending some time analyzing an investment where you will remain invested for many years may not be seen as a drawback. Likewise, the risks in short term investments differ from what you face in long term as just the passage of time would change the dynamics of the investment.

With these insights, you can evaluate the role of real estate in your portfolio and how it can help you reach your desired destination. Should you invest in land or buy and flip a flat? Should you buy, hold and earn rental returns on a second home? Or should you consider home asset backed financial investment options? The nature of each of these investments including the general risks, specific risks, potential sources of gains is reasonably well understood.

But the onus is still on you to board the right vehicle, know the route to some extent and be prepared to change track with the help of experts when unexpected events happen.

New age of Property Investments in India

New age of property investments in India

Real estate as an investment option is falling out of favour. While a few factors such as the black money bill may be cited as a reason for the cyclical downturn, fundamentally property as an asset class is maturing in the country. From being a opaque system with many inefficiencies, the industry has been changing in the last decade as institutional capital is bringing more professionalism and transparency.

In the past, homes were built for consumption only and not as an investment. Homes were also self-constructed and there were no large scale projects. With real estate industry picking up, there was a need for capital. Property developers looked to investors to raise money, as traditional funding sources such as banks and NBFCs were not always willing to lend to, especially during the early stages of a project.

As an alternative to money lenders, larger developers went with real estate private equity funds. They were all the rage in the mid 2000s and many foreign and local funds were launched. They offered funding in two models – equity and debt. Equity oriented funds provide money in the early stage and when the property is sold, get their returns by way of price appreciation. Debt oriented funds offer loans in any stage to be repaid with interest (ranging from 18 to 25 per cent annually) after a certain period. There are also hybrid funds where the developer pays an assured minimum return plus a share of the price appreciation.

While it was a good deal for developers, many foreign funds and those that invested in commercial property such as office buildings, malls and retail space were stuck as they could not sell their stake. There was a shake up and many funds shut shop – the number of funds is now down to about 10, from 50 in the go-go days of 2007.

Among those left standing are local funds with a focus on residential real estate. Their strengths include offering thorough diligence on the builder and the project. They also monitor progress, put in systems to ensure quality and on-time delivery – all to ensure they can earn their return. Home buyers and developers also benefit in this bargain.

These methods have worked and the funds have been able to earn healthy returns even when the market was beaten down. The case in point is ASK Investment, a real estate private equity fund. They had at least four exits from the residential segment investments at multiples of 2.25 to 2.5 times in about four years. These work out to annual returns of 20 to 25 per cent – not a bad deal for any investment.

So while investors who bought physical property were stuck with low returns and inability to exit, wealthy investors who took the financial ownership route through real estate PE funds were laughing on their way to the bank. Real estate PE funds also offer diversification benefits as they invest in different geographies. Based on the risks assessed for the project and developer, the returns are set and systems are put in place to reduce issues.

The main disadvantage of the PE funds however is that they need a large corpus – the minimum investment is Rs 1 crore, as per SEBI regulations. Money flow to these funds increased over 20 per cent in 2015, after doubling in 2014.

In many developed countries, there are more avenues available for smaller investors to also benefit from economic ownership of property, rather than physical ownership. These include real estate investment trusts (REITs) which are entities that can invest in under-construction and completed properties – both commercial and residential.
REITs in India are however limited to income generating commercial properties. And worse, there has not been a single REIT announced, nearly 18 months* after the rules were clarified for launch.

Financial instruments backed by physical assets such as property offer retail investors a way to invest in property while eliminating the hassles with physical ownership. The cost of capital for developers is also reduced thanks to the additional funding source; this in turn could make homes more affordable for the end user. Making the residential property market more institutionalised – with more economic ownership choices for investors big and small – will only help the system further.

Real Estate Taxation

Gains or Losses that arise from the sale of any capital asset like property, shares, securities, gold etc are subject to capital gains tax under the provisions of the Income-tax Act. No implication on purchase of property under Income tax.

Overview of taxation on sale of property

Gains or Losses that arise from the sale of any capital asset such as property, shares, securities, gold, etc. are subject to capital gains tax under the provisions of the Income-tax Act. There are no implications in the Income-tax Act upon purchase of a property.

Nature of capital gains

If the property is held for 36 months or less, the resultant gain is called Short-term Capital gains. If the property is held for more than 36 months, the gain is referred to as long-term capital gain. The short-term capital gain is taxed at the normal rate of tax (i.e., at slab rates for individuals and 30% for companies) while the long term is taxed at 20%, subject to certain conditions.

Let’s now look at how to compute capital gains.

Computation of Capital Gains

The basic format for the calculation of capital gains is laid out in Table 1.