The real state of the real estate market is quite dismal for the builders. Finished and near-finished homes are readily available, but there is hardly any demand. Several projects are still stuck in the construction phase and far from completion.
Kishor Pate, CMD, Amit Enterprises Housing, says, “Property valuations are at their lowest point and developers are more than ready to negotiate with serious buyers.” So if the prices haven’t gone up and have, in fact, more or less stayed stagnant, can investors now upgrade or move to a bigger house or go for a second home?
“There was a trend of buying second homes few years ago, but slow growth and high interest has put a stop to this trend as the returns are not good. Real estate as an investment option is being put on the back burner as the returns are poor currently,” says Manavjeet Singh, CEO & Founder, Rubique.
How low are the prices now
A builder typically has several cost heads comprising the total cost of a fully constructed building. First is the ‘basic rate’, represented in per square foot (psf). In addition, there could be a preferential location charge (PLC), car parking, club membership charges and others. (Other charges could amount to nearly 10-15 per cent of the actual cost.)
Most developers seem to be going easy on these and might waive them off. Shveta Jain, Managing Director, Residential Services, India, Cushman & Wakefield, informs, “Builders have generally been resorting to means that make the overall deal attractive for the buyer. This has been due to the compulsion of a high unsold inventory and a tight liquidity situation for the developers.”
Different developers are resorting to different ways to lure customers. Pate says, “They will offer to reduce the cost of a home in their projects in other ways. Fully-furnished homes are only one such avenue. The most popular offer right now is all-inclusive rates which cover the usual cost of stamp duty, registration and value added tax (VAT). No Equated Monthly Instalment (EMI) schemes are also popular, though buyers should carefully study the fine print and long-term implications of such offerings.”
Exploring second home option
There may be individuals, especially those from double income families, who are now exploring the possibilities of investing in real estate. Pate says, “The recent slump has served to bring prices down to their lowest levels, which, in fact, vastly improves the rationale for investing in second homes. This is an ideal to time to make such a decision, especially if the second home is within main city limits. This permits the housing of one’s extended family, and also provides an excellent avenue for rental income.”
The expectation to get capital appreciation in the short-term should, however, be ruled out unless it’s an upcoming location with limited supply. Jain says, “As per the current market situation, real estate investment should be done with a long-term horizon and not with the expectation of a quick return. Also, the location of investment is a key parameter to be considered before making any purchase decision.”
For those looking to invest in real estate, these could be certain important factors to look at:
Outright purchase: Buying a second home on a home loan may not be a good idea. It might take 8-10 years for you to break even after considering the interest cost of the loan and even after accounting for the tax benefit. Therefore, try to put your own funds into the deal and rely less on loans. Also, have a prepayment plan in place to finish the loan as early as possible.
Location is the key: If your second home is for investment purposes with an eye on rentals, search hard. Location by itself can turn the tables and all calculations in your favour. Pate says, “Go for locations which are close to primary workplace areas, which have a good saturation of office complexes. Also, look for good social and civic infrastructure, adequate water availability and presence of public transport.”
New projects versus nearing completion: This is a tricky situation. Prices of new projects (primary market) could be lower but the risk element is high as most builders have failed to deliver projects on time. On the other hand, one could look at completed or projects which are near-completion in the re-sale market. Jain says, “In the current situation of availability of inventory of completed housing units in both primary and secondary markets, preference for the same has increased over under-construction or new projects.”
Remember, the builder may not have cut the rack rate (price at which builder sells) but properties in the same project may be available with some investor-owner who wants to offload it at a lesser price (after keeping his share of profit, but lesser than the builder’s rack rate).
These days, the expectation of capital appreciation in the short-term is muted across most locations. “High capital appreciation may not be a factor at the moment, which is precisely what has led to the amenable prices prevalent in the market today. However, good rental potential is certainly a possibility, and both the flat‘s size and location should support this factor.” says Pate.
Several factors determine the movement of prices in the real estate market. Don’t speculate about prices in the short-term and focus on the long-term potential of the property. Jain says, “An emerging location with plans for infrastructure development in the future is expected to yield capital appreciation in the long-term.”
Credits ET Realty