Mantra for Real Estate Investments is to have Patience
Property investments can deliver good risk-adjusted returns in the long term but take a prudent view
Starting with the folks who are currently on the
sidelines and are prospective end-users or investors—if you are waiting
for a price correction before taking a decision, please set your
expectations at a realistic level. There is unlikely to be a situation
wherein suddenly every property or every project will be priced 20%
lower. Instead, this correction will be a localized affair varying from
developer to developer and project to project.
Since you are in the market to buy, hopefully you have
already zeroed in on a micro market or a few specific projects. Keep
tracking those and let the sales guy know you are a serious prospect.
That way when prices are lowered because of the market situation or the
developer’s financial position, you will be in the loop.
If prices do drop by a meaningful number (there is no
benchmark but upwards of 10% is a good starting point), take a quick
call. Don’t keep waiting for them to drop further because they may move
back up instead. If it makes sense to you, lock in a per sq. ft rate.
When doing so, always factor in the freebies that the developer is
throwing in to work out your effective cost of acquisition. This is very
important and a perspective that many people forget to take. For
example, if the developer is offering to pay the interest on your home
loan for two years, it may mean a 10-15% reduction in your total
acquisition cost. Similarly, if someone is paying for your registration
and stamp duty costs, it may mean a 5-10% cost reduction overall.
Usually developers would be sensitive about reducing their headline per
sq. ft rate dramatically, so focus the rest of your negotiation on the
payment plan and things such as floor rise, preferred location charges,
parking charges, etc.
When thinking of a home loan, again you should worry more
about the total cost of property acquisition rather than the current
interest rate. It is more important to secure a good property price—the
floating interest rate should take care of itself over the life of the
loan.
This is all good stuff for people waiting to buy, but what if you have already invested?
If you are an end-user or a medium- to long-term investor
with existing property investments, just sit tight. You should do
nothing while the market goes through its cycles. There will be nothing
gained by panicking and trying to exit while the market is tumbling
downwards.
Hopefully you have at least a medium-term (around
four-five years) view on your investment. That should be sufficient in
most cases for the project to be delivered and for property markets to
turn the cycle. Once a project has been delivered or is close to
delivery, you have a much better chance of finding a buyer and exiting
with a profit.
If, however, you are a speculator who has invested in
more properties than you can pay for, try and effect an exit from a part
of your portfolio so that you are in a position to fully pay for the
balance. At this stage, do not be greedy for profits. Remember, your
objective is to minimize your liabilities. If this means you have to
book a loss or agree to a longer payment schedule from the buyer, take a
decision rationally keeping your objective in focus. Offloading
under-construction properties is easier said than done in shaky markets,
but if and when achieved, it would serve you well to memorize the
lessons learnt.
Property investments can deliver good risk-adjusted
returns over the long term; however, like everything else in life, one
has to take a prudent view. The simple mantra is to undertake a thorough
due diligence on the developer and the project beforehand and invest in
something that you can afford. And lastly, have patience.
by Ritesh Vohra is partner, real estate investments, IDFC Alternatives Ltd
Source: The Mint
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