INVESTMENT 2000: REAL ESTATE

INVESTMENT 2000: REAL ESTATE
It's time for that dream house

If the only thought that stops you from investing in a house is the size of your pay-cheque, think again of low cost, long-term loans. Or read this primer.

By Akshay Kumar

You've just got your bonus cheque, and you certainly aren't the type to blow it all up in one night of extended revelry. So what's your plan? Do you plan to ride the crest of a surging stockmarket; invest in a mutual fund; laugh all the way to the bank; or buy a house.

If I were you I would choose to buy a house. By now, you must be making apologetic noises about the size of your cheque. True, real estate is a high-value investment option. But a sound investment is all about timing, and, NOW is the time for that dream house.

I know prices are crashing. But has the market bottomed out?

Clarification: Prices have hit rock bottom. And we can certainly expect to see a levelling in the prices of residential property in the next quarter across the four metros. So if you have been clever enough to wait, now is the time to make your move. In fact, the Mumbai residential property market has shown a 10-15 per cent upturn over the last two quarters.

Real estate is a long-term investment. How far away is the next crash?

Clarification: Any long-term investment is exposed to long-term volatility. However, a clear understanding of the economics of real estate can help you steer clear of surprises. One, real estate prices crashed because projects that were initiated during the boom years (1992-1995) were completed in 1998, at a time when the economic engine was sputtering. Thus, by mid-1998, the prime generators of demand were the genuine buyers (as opposed to the pure investors), and, by early 1999, real estate prices had fallen by between 25 and 40 per cent.

Two, a typical real-estate development cycle comprises three phases. The development boom phase starts at the peak of a general business cycle. But when economic growth is declining, and projects initiated in phase one are completed, there is a space surplus. This results in an overbuilt phase. This is when prices start slipping. When the economy is back on a path to recovery, the absorption phase begins. This causes the gradual utilisation of existing space. The result? Rents and property values rise, with very little new construction activity taking place. An absorption phase gives rise to another development boom. Typically, each phase lasts for a period of five to seven years.

But I'm a salaried person. Can I afford this investment?

Clarification: Accessibility to low cost, long term loans has changed things. A fall in interest rates from 16.5-18 per cent in 1995-96 for loans upto Rs 10 lakh, to 11.5-13.5 per cent in 1999-2000, has led to an increase in purchase-activity in the residential market. But falling interest rates are just one part of the story. With competition hotting up in the housing finance segment, prospective buyers can look forward to higher (loan) ceilings, lower processing charges, longer tenure loans, and flexible repayment options.

Am I not better off investing in the booming stockmarket?

Clarification: The market is a high-risk, high-return investment option that displays high short-term volatility. In contrast, investments in real estate exhibit long-term volatility, and are low-risk, modest return propositions. The average investment in residential real estate will give you a yield of 8-10 per cent. However, housing is a chart-topper in the wish-list of an investor's personal assets. Most young families today consider a house a logical high-point in their asset acquisition continuum.

Am I 'old' enough to buy a house?

Clarification: Traditionally, only people on the verge of retirement were supposed to look for houses to buy. However, this mindset is changing. Five-fold increases in salaries over the last six years, coupled with a stagnant inflation rate, has led to higher disposable incomes. Moreover, shrinking down-payments and attractive finance schemes have made the formidable first installment a thing of the past.

A final word of caution, though. Buying a property can be a tedious and tricky proposition. You should definitely ensure that all the documentation is in place and bargain hard for a better deal from both your bank and the property developer. Do ascertain the credibility of the builder in terms of compliance with all the regulations, whether legal or environmental. Finally, watch out for the small print on cost escalation and project delays.

So take a long hard look at that cheque again. You might just want to transform it into a home.

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