We have often heard that an investor makes a killing buying or selling real estate in India. It is also an often heard tale that someone lost money in a project that never materialized due to issues that crept up and thus rendering the property impossible to sell. All investors aim to be savvy investors rather than unlucky ones. When investment is made with care and detailed knowledge of ground realities, real estate investment can earn substantial returns. The following must be gauged critically before making any buying decisions for successful investment.
Location: The Indian economy is a fast growing economy and presents the investors with an opportunity to make fabulous wealth. There is always a difference in the rate at which different cities develop due to inherent features. Different factors affect the speed of growth:
Population growth of a city: It is advised to not invest in a city with slow population growth.
Growth corridors within the city: Population growth and job growth go hand in hand. The position of grade A offices is a good measure of growth – howmuch area is built and how much is under construction.
Social Infrastructure: The availability of social and lifestyle resources in and around the city drives the growth of the city. Proposed malls, schools, hospitals, entertainment indicate growth in the near future.
Access: In the Indian context, typically property development precedes building of roads. However, major roads tend to be planned and announced years ahead of construction. Roads provide the accessibility for commuting to other parts of the city, state and country. Knowing about upcoming roadways and their plans help in making sound investment decisions and it is safe to assume growth in such areas. Plans of metros also act as a growth factor.
Type of Property: Indian real estate offers four type of investment avenues- agricultural, industrial, commercial and residential. Agricultural land is only available to Indian residents and NRIs. Industrial and commercial properties require a significantly large amount of investment and run the risk of having lower liquidity and high vacancy. They however present an opportunity of higher returns in the form of cash flow and capital appreciation. Residential property is considered to be the safest and easiest option. They are available in relatively smaller ticket sizes and offer returns in the form of rentals when leased out. Owing to the smaller capital value requirement and higher demand, these properties are easier to liquidate. These are typically villas, apartments and plots in gated community.
Reputation of Developer: To avoid the risk of an investment turning sour, it is always important to do a proper background check on the developer. Like any other country, India has its fair share of some excellent developers as well as some less reputable ones. Checking the organization’s track record will go a long way in protecting against losses. Evaluate the company’s credentials in areas of financial strength, their understanding of investors’ needs and capacity to meet them, construction quality and adherence to timelines. Invest with a developer that checks these to avoid significant risk to your purchase.
Stage of Development: Each stage of a project’s development generates returns depending on its’ unique characteristics.
Pre-launch: This is the stage after land acquisition but prior to the official launch of the project. Investments made in this stage usually offer the best returns however it is essential to check the reputation of the developer and ensure the land title has been adequately vetted.
Launch: The project is ready for commencement after all government permits have been obtained. Launch prices are usually close to market rate.
Partly constructed: Most investors enter into projects at this stage. The project has already taken off and is partially completed. The returns after coming at this stage escalate slowly.
Completed: The price of purchase would be the highest. These properties are a good source of rental income. Commercial properties would be preferable over residential to generate cash flows.
Quality: Quality of technology can vary even within same neighbourhoods and price brackets. It is generally perceived that higher prices would mean better quality, but that may not hold true in all cases. An attractive investment would be priced lower than similar projects and in an area with equivalent or superior specifications. Quality of amenities must be done before investing however this check is usually possible in the pre-launch stage. Once the project is launched, sales and prices escalate quickly to meet demand.
Price of the Project: Project pricing can be very tricky. No two developments are identical and project in India can vary tremendously in terms of road access, the appeal of micro-environment, specifications and amenities. Neighbourhood-based generalizations would not give a correct price estimate as most neighbourhoods have different price brackets. The best way to reach an objective price estimation of any project is by taking the help of an expert.
Expected Price Rise: Anticipation of future gain is inherent in any investment. However, at the time of purchase, very few investors sufficiently analyse the market to estimate future prices. It is imperative to forecast the price growth for the particular property type. Consider factors like planned developments of highways and metros, sales pattern of similar developments, the rate of appreciation for each property type and at different stages, the pricing practices of the developer, the upcoming social infrastructure and other similar factors. The exercise of estimating future price trend will ensure that the investor is not in for any surprises by the market at the time of sale.
Title of Land: It is crucial to perform due diligence on the title of the land however it is a cumbersome process as land ownership dates back to decades. Any defect in the land title of the previous owner can invite litigation. To further add to this, most real estate projects are a result of aggregating land pieces from different sellers. Thus it is only possible for an investor to do a cursory check on property title and are exposed to unnecessary risk. An expert can provide a thorough title check and would be value for money to get a title report.
Investor Protection: It is not uncommon for developers to exceed the timeline promised for completion of a project. However, there are delays in meeting the deadlines and not enough remedial measures available to compensate the investor adequately. It would be ideal to hold land as collateral but individual investors typically do not have the bargaining power to make this happen. Investors making large investments must involve experts to be able to get collateral which is twice the value of the purchase to safeguard their interest.
It is essential to check these before making any investment decision. Solid returns come only to a prudent investor. Thorough research before investing can offer an investor outstanding profits in the Indian real estate sector.