Understand property market dynamics

Learn from 2015 to invest in residential real estate during 2016

Year 2015 ended without bringing much cheer to the residential real estate sector, but it certainly will be remembered as the year that formed a solid base for future growth. Some major highlights:

• Relaxation in FDI rules will help more investment to flow in the country with two of the major obstacles removed: Minimum of 20,000 square metres of development, and a minimum capital of $5 million.
• Passage of Real Estate Bill by the Union Cabinet means a more vibrant, efficient and, most of all, more transparent real estate sector that is beneficial to both buyers and developers.
• Recommendations of the seventh Pay Commission to hike the salary of state as well as central government employees by almost 23.6% will have a positive impact on the demand side of residential real estate.
• A growing economy, reducing inflation and a rate cut of 50 basis points by the RBI will result in lower home loan rates.
• The launch of initiatives like Smart Cities, AMRUT and Housing for All by 2022 will create a revolution once they get into action mode. The groundwork is already happening.
• Despite the sector operating below par, it attracted investments of $8 billion or Rs. 53,000 crore. This might become the highest in the preceding seven-year period.

These factors can contribute significantly to the growth of the real estate sector going forward. However, one still needs to be pragmatic while making decisions related to purchase of residential property in 2016.

Points to take into account:

• Owing to the slump in the realty market over the past 2-3 years, there has been a lot of churn in the market in terms of demand and supply alignment. The days of humungous returns are past; returns will be more aligned to actual market forces instead speculation.
• More than ever before, investment decision must be preceded by a thorough due diligence and expert advice. The market will perform differently in different areas, budget ranges, configurations and typologies even if the broader parameters remain the same. The due diligence must involve a detailed background check of the developer and extensive research about the project in terms of whether or not the various statutory permissions have been obtained, its location, etc. If there is the slightest reason for doubt, expert guidance is a must to avoid getting trapped in the wrong project.
• In the case of under-construction projects, establishing a developer's cash flows is more important than anticipating ROI. The recent slump in the realty market has squeezed liquidity out of the system and further limited the ability of developers to build more projects or sell out the existing ones with ease. In other words, the developer's ability to fund a certain project to completion is a more important factor to scrutinize than how much profit one can rake in from investing in the project.
• Investment in the realty sector always involves risk; there is never a guarantee of assured returns. It is important for every investor to assess their resilience to and preparedness for risk.
• For end-users, there is no such thing as timing the market, because for buyers looking for a home for personal use, there is no right or wrong time. In fact, it is a buyer’s market right now. However, if one plans to enter the market as an investor looking for healthy returns, then it makes sense to time one's entry. The choice between opting for a wait-and-watch approach and an immediate entry must depend on how conducive the overall market is.
• The most important thing is not liquidity, but actual need. In other words, the first step must be to understand whether the identified property actually has exactly what one is looking for, or if it exceeds or falls short of those requirements. This applies equally to investors and end-users.
• Investors must look beyond the obvious. While mature markets might be safe bets, upcoming markets are where the action is and are key to earning better returns.
• End-users must do a rent vs. buy analysis. The current employment market in the country suggests frequent movement of employees across cities. In such a scenario, compromising one's job for real estate concerns may not make a lot of sense. Buying property in one's home town and renting it out while personally living on rent in one’s city of employment should be seriously considered.
• For end-users, understanding capital appreciation is important. If one is planning to invest in property with a loan, studying the identified market's performance in previous years as well as the future potential is critical. The performance of the rental market should not be ignored, either. Situations where one's outgo on interest or maintenance on a property is more than the generated income must be avoided.

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