There is enough scope for small investors to invest in real estate if they do so wisely, says SHOBHIT AGARWAL
In India, small real estate investors currently do not have as much scope as institutional investors. They can hold multiple properties, but banks will generally not fund beyond a second home loan. That does not mean they cannot invest beyond that from their personal accruals. They certainly have the option of investing in rent-generating assets, which can fetch very decent returns if they have been purchased wisely.
Despite the present limitations for small investors, a property investment can give the buyer protection against inflation. Like gold, real estate tends to retain its intrinsic value. However, unlike with gold, it is possible to earn a regular income on it. Depending upon various economic factors, a property owner can increase rent in times of high inflation. Also, real estate is always a good investment option because of the possibility of capital appreciation. Of course, an individual must decide on the basis of his own income, existing financial health and risk appetite how much he should allocate for real estate.
The limitations pertaining to buying and selling of real estate in India exist to prevent speculation. Considering what has happened before such regulations were enforced more strictly, they are required. We do not want a situation similar to that faced by the US in this country - thankfully, our banking system is a lot more conservative, and this has been one of the main reasons why India did not suffer as much as other countries did in the recent economic turmoil.
REITS And REMFs
Unfortunately, there is currently no way of predicting when they will become a reality. Small investors will only get real investment power when REITs (Real Estate Investment Trusts) and REMFs (Real Estate Mutual Funds) see the light of day in India. These vehicles will present a liquid, dividend-paying means of participating in the real estate market. We are all still awaiting clarity on the introduction of REITS and REMFs in India.
Reliability Of Developers
The extent to which one can rely on the professionalism of a developer depends both on the developer's existing credibility in the market and on the strength of enforcement agencies specific to each state. Larger developers are becoming a lot more transparent and professional in their business dealings. There is increased accountability in the organised sectors, brought on by greater awareness among buyers and also increased investments by international investors. However, players in the unorganised parts of the market - especially those who have a limited number of smaller projects to their name - are often not subject to the same accountability.
Therefore, the safety of an individual real estate investor's interests in a property transaction continues to depend a lot on personal research and understanding of the market, especially in local terms, prior to purchase.
Real estate transparency in India is increasing, but it is currently of greater benefit to larger investors who have full-fledged real estate portfolios. In any case, investors have to judge opportunities according to local dynamics, because real estate in India is a local business. For instance, FSI Regulations, approvals, saleable area norms, stamp duties, property taxes etc. change from city to city. This requires a thorough analysis and diligence on an investor's part. It is advisable for investors to deal in markets that they understand best.
Primary Factors To Be
Location, legal non-encumbrance of the property, present and future market drivers in the locality, duration of holding capacity, financial ability and personal investment objectives are the primary factors to keep in mind while investing.
One should ascertain the correct entry point, which is a challenge in the current times. While it is understandable that buyers wish to wait for prices to fall, there is a definite danger in waiting too long for the perfect opportunity. Much as in the stock market, it is impossible to predict the point of lowest ebb in the real estate market. The buyer may lose out on the best properties and deals by waiting too long.
Individual property investors should be focused on what they are looking for, and should be selective about their purchase. Purchase decision should be based solely on the availability of a good deal in the location of choice.
When To Invest
The right entry point for property investment is something of an enigma - it can usually only be judged in retrospect. At the current time, smaller property investors should realise that certain areas within larger cities like Mumbai may correct in the mid-term; it may be wiser to delay purchase for eight to ten months. In the case of some other cities, the best time would probably be now. One cannot give a blanket judgment on this; the best course is to study the local market and inquire into the prevalent and expected dynamics there.
However, a good yardstick is affordability. One should also know how much of one's wealth can feasibly be invested in a real estate asset. Once this is determined, and a property with sufficient appreciation potential is available at the desired location and at a good price, an investor should make his move. Taking a speculative watchand-wait stance should be a game of experts, who are also willing to risk a loss if they time their move wrongly.