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An
illustrious 19th-century religious figure once famously said:
"Money is earth; earth is money." Now, the said religious
figure may have meant his words to connote the futility of pursuing
worldly pleasures (as in money being comparable to humble earth,
and not deliverance), but (with due apologies to the revered one),
his words sure sound prophetic when looked at in a different context.
In the consumerist world of the 21st century, that quote can be
interpreted in only one way: earth (as in land, or property) is,
indeed, money. Big money.
And money, at least in reasonable quantities,
is what you'll need when you evolve from a young, high-salaried,
dashing go-getter (with your own home, what's more) of today to
an elderly, blissfully retired senior citizen of tomorrow. Because
when you are retired, without any tangible source of income, you'll
need financial backup, big time. And what better than an assured
income from property (rent from, or sale of, second house or commercial
property) to act as a shield against the vagaries of old age?
| The Minister's Recipe |
| If buying a
house, particularly a second one, is an attractive proposition
today, you've got Finance Minister P. Chidambaram to thank.
The Minister's tax reforms have given investors plenty of
reason to go in for that elusive second house. Pre-Budget
2005, home loan takers were entitled to a maximum of Rs 1,50,000
(annual) deduction on income, on the interest component of
the loan, and a maximum rebate of Rs 20,000 on the principal
component. That was only if your annual income was less than
Rs 5 lakh. Post-Budget 2005, the interest provision still
holds, but the rebate on the principal has been hiked to Rs
1,00,000 under the new Section 80 CCE of the Income Tax Act.
That adds up to a rebate of Rs 2,50,000 (even if your income
is above Rs 5 lakh), which should be reason enough for you
to make your move. |
The Real-estate Opportunity
First, some numbers. Gurgaon, a small town
in Haryana some 36 km from the heart of Delhi, has seen a property
boom in recent times, and prices have consistently been on the
high growth curve. For instance, if you had bought a flat for
Rs 29 lakh in Nirvana, a residential block in Gurgaon, in early
2004, you could have sold it today for anywhere between Rs 55
lakh and Rs 66 lakh. Then, take Noida, a town in Uttar Pradesh
some 25 km from Delhi. A flat bought at Rs 1,400 per sq. ft. next
to the Noida Expressway (a 23-km highway that connects Noida and
Greater Noida) in 2004 would have fetched you around Rs 3,200
per sq. ft. today, no less. Now, 100 per cent capital appreciation
is certainly not the norm. Mumbai, for instance, has seen 15 per
cent average increase in property prices, with some areas registering
hikes of 30 to 40 per cent. But then, that's still much higher
than what any other investment vehicle can provide (except equity,
perhaps, but then there's a risk attached to it).
This rise has not been restricted to larger
metros (and towns on their outskirts like Gurgaon or Noida) where
risks are low and liquidity is high. Even Category B cities like
Pune and Hyderabad offer reasonably high rates of returns. And
experts reckon that rates in Category C spaces like Coimbatore,
Vizag, Navi Mumbai and Faridabad are slated to go up, since their
potential is yet to be fully tapped. Contends Anshuman Magazine,
Managing Director, CB Richard Ellis, South Asia: "Real estate
prices witnessed a 30 per cent to 40 per cent jump in 2004 across
the country."
 Prasanna
Kumar, 26, Associate Consultant, MindTree Consulting,
Bangalore
Family: Father Subbarayulu,
65, ex-serviceman; mother Padmavathamma, 56, housewife; sisters
Sumati, 32, housewife, and Latha, 35, school teacher; brother
Srikanth, 30, Project Manager at Motorola
PROPERTY BRIEF: Many people
prefer to buy and rent out apartments and houses in Bangalore
itself, but Prasanna Kumar is different. He decided to take
a long-term view of things and invest in property (land,
not apartments) on the city's outskirts. He invested Rs
3.5 lakh in two 30 x 40 sites, one in 2002 at K.R. Puram,
near Whitefield, Bangalore's technology hub, and one near
Anekal on Bangalore's southern fringe in March this year.
His strategy has paid off, with the value of the two properties
combined having multiplied three-fold already to be worth
Rs 10 lakh. By the time he retires, they should fetch him
a tidy sum.
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The Property Shield
So, should you go for that second house as
a retirement planning tool? As the returns illustrate, it is certainly
worth a look. After all, capital appreciation is not the only
payback from property. It can even be a source of steady monthly
income through rentals. Now, rentals obviously will not give returns
in proportion to capital appreciation. Says G.S. Rana, Head, Residential
Division (North), Chesterton Meghraj Property Consultants: "The
rental yield is anywhere between 4 and 6 per cent, sometimes not
even enough to cover your EMIs (equated monthly instalments)."
True, but while EMIs remain constant throughout their paying period,
rentals increase by an average of 15 per cent every three years,
and you still have your property. This means that while you get
the rental payments every month (which can be used to pay off
the EMIs in full or in part till the entire loan is paid off,
and then used as income post-retirement), your property continues
to escalate in value. Says Priyaranjan Kumar, Head, Investment
Sales, Cushman & Wakefield India: "If long-term (seven
to 10 years) capital appreciation is also factored in assuming
stable market conditions, then annualised yields are effectively
between 6 and 10 per cent."
That would mean that from a long-term investment
perspective (which is what retirement planning is all about),
real estate is a better bet than other popular investment vehicles
such as fixed deposits or debt funds, which give around 5 to 6
per cent return on capital. And if you're thinking about stocks,
they may give better returns, but are more risk-prone due to the
uncertain nature of stock markets.
 K.S.
Shyam, 43, Head (HR), Agro Tech Foods, Hyderabad
Family (seen in picture): Wife
Dr. K. Mala Shyam, 38, pathologist; daughter Prathyusha, 15,
student; son Anitej, 10, student
PROPERTY BRIEF: K.S. Shyam
currently lives at Banjara Hills in Hyderabad in a company-leased
accommodation. In July 2004, he bought an apartment in the
Sarjapur area of Bangalore as a long-term investment. The
three-bedroom, 1,800-sq. ft. apartment required putting
in around Rs 40 lakh with the help of a Rs 30-lakh bank
loan. Being a five-minute drive away from the Wipro office,
15 minutes from Whitefield, the city's IT hothouse, and
10 minutes from the airport, Shyam expects reasonably high
rent in the region of Rs 30,000 per month. Next, he's planning
to buy residential property in his native Hyderabad by the
year-end, where he plans to settle later in life. The Bangalore
apartment will then be of great financial value as a steady
source of income.
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Residential property (such as a second house)
is not the only real-estate investment option, though. There's
also commercial property, which you can rent out for greater returns.
What factors should you take into account here? Advises Rajiv
Sabharwal, Head, Mortgages & Real Estate, ICICI Bank: "The
important thing is to see how much the property can earn today,
and its ability to sustain and enhance earnings in the future."
For instance, if you can afford to buy a 200-sq. ft. shop space
in a prime locality, the rentals on such property can vary anywhere
between 8 per cent and 10.5 per cent (annual), depending on factors
like the locality and the tenant's paying capacity. And though
net return from real estate investments in commercial property
has fallen in 2004 (10.32 per cent) compared to 2003 (11.33 per
cent) and 2002 (15 per cent), that's still better than the around
6.5 per cent interest you're likely to earn from fixed deposits
or 10-year debt funds.
| The Foreign Hand |
|
No, there's nothing sinister
about the foreign hand here. We're talking about the government's
decision to allow 100 per cent FDI in construction development
projects such as townships, hotels, resorts and the like,
which is likely to fuel greater interest in property. There's
an added incentive as well. Earlier, foreign firms had to
utilise a minimum of 40 hectares of land for a project;
that has now been brought down to 10 hectares, increasing
the possibility of construction happening closer to metros,
where the real action is. Says Anshuman Magazine, Managing
Director of CB Richard Ellis, a real-estate consultant:
"The entry of foreign investors will increase the housing
stock in the country. This is good news for consumers."
According to credai (Confederation of Real Estate Developers
Association), the housing sector in India could see an infusion
of $7 billion (Rs 30,800 crore) in the next 12 to 18 months,
of which nearly $5 billion (Rs 22,000 crore) will come from
the foreign players. That, more than anything else, will
ensure quality housing for you, and for your investment
plans.
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Giving an edge to the commercial rental angle
is the fact that action in this area appears to have shifted to
the outskirts from central business areas of metros. For instance,
the Bandra Kurla Complex in Mumbai's suburbs is seeing increased
occupancy. Places like Noida and Gurgaon are also witnessing a
high level of leasing activity. Gurgaon alone is expected to add
another 21 million sq. ft. of commercial space in the next 21
months.
There's also the small matter of the tax
incentives given for housing in the latest Union Budget (see The
Minister's Recipe for details). That, combined with crashing home
loan rates, easy availability of funds from most banks, higher
disposable incomes, and a spate of high-quality constructions
should be incentive enough for you to go scouting for that dream
(second) house or shop space. It would be, however, prudent to
remember that property prices are subject to five-year cyclical
movements, and your decision should take into account factors
such as demand-supply gap, sector growth and inflation.
But then, if you were to look at property
investments as a retirement planning exercise, you would be ideally
looking at staying for the long haul. And if you can do that,
your retired life may well have that elusive element: peace of
mind.
-additional reporting by
Rahul Sachitanand and E. Kumar Sharma
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