Insights

Property Investment

Property or Real Estate is a tangible asset that provides for psychological comfort, security and satisfaction. Home ownership is the most primary form of Property Investment. The property market like stock market, reflect and depend on the economic health of the country and therefore has its own peaks and troughs. The return on investment of property is reasonably consistent because of the phenomenon of property appreciation. In a growing economy, the property prices may rise much faster than the rate of growth of the economy.

The factors to be considered on property investment:

  • Location - This is an oft-repeated mantra, which is one of the important factors which one should consider before making a property investment since the appreciation of an investment is highly depended on it.
  • Price - Another factor while choosing a property is whether the price is commensurate with existing market values.
  • Time - The basic factor of any investment is the timing of the investment - picking the right time to enter and to exit the investment - is one of the crucial factors of property investment as well.

Property investment may be broadly sub divided into different formats like

  • Residential Plots
  • Commercial Plots
  • Independent Villas
  • House in a Gated Community, either villa / apartment
  • Farm House
  • Apartment
  • Office Space / Shop Space
  • Agricultural Land / Plantations
  • Industrial Land

Areas of a building are classified as:

Carpet area is defined as the precise area within the walls of an apartment. If a wall-to-wall carpet in laid in the entire home, the area covered would be the carpet area.

Built-up area is inclusive of not just the carpet area but also the area being occupied by the walls of the home as well.

Super built-up area takes into account all the area under the common spaces which is the apartments' proportionate share of the lobby, staircase, elevator and the corridor outside the apartment, the terrace, security room, electrical room and/or pump room. The cumulative total of these 'extras' is taken into account and divided by the number of apartments in proportion to their size.

Plinth area is the area of the structure measured at the plinth level. Plinth area and the built up area of an individual house are the same.

Undivided Share is a share of land allotted to the property buyer, normally in apartment or even in gated community houses, while purchasing the property and which is registered in the name of the buyer. An apartment buyer is entitled to the constructed building area which includes the buyer's specific flat and the common areas and the proportionate share of the land where the building is constructed. The ownership of an apartment depends on the undivided share of the land registered to the buyer's name.

Buying from a Developer

There are several factors to consider when buying property that is still under- construction.

  • Reliability of the developer is one of the most important factors to be considered. The buyer should enquire as to their reputation and record before committing any buying in any property still in development.

The following important documents need to be checked.

  • An approved plan of the building along with the number of floors, and that the floor on which the apartment intended to be purchased is approved or not.
  • The KBR rules as applicable in that area and the developer is not in violation of front setback, side setbacks, height and so on.
  • The developer owns the land on which the building is located, or whether they have undertaken an agreement with a landlord.
  • The land is not designated in Coastal Regulation Zone (CRZ), agricultural land or green zone.
  • The specifications given in the developer's brochure correspond with the plans of construction.

Payment Plans of a Developer

1. Construction Linked Payment Plan - In this plan, payments are made to the developer in installments over a period of time spanning the time taken for construction of the building.

2. Down Payment Plan - In a down payment plan, the buyer would be required to make a payment of 10% of the purchase price upfront with another 85% within 30 days of the booking date. The balance 5% may be paid at the time of possession of the property.

3. Time Linked Payment Plan - This plan is based on payment in installments, usually with payments being made every 2 months over a period of 24 to 36 months. The payment schedule is structured based on time and not the stages of construction, and the buyer would have to pay the installments on schedule irrespective of whether the construction is proceeding on schedule or not.

4. Flexi Plan - The flexi plan includes features from both the down payment and the construction linked payment plan. In this plan, the buyer would have to pay 10% at the time of booking and another 30 to 40% within 30 days. Thereafter the payments are structures as with the construction linked payment plan.

Various Property offer options from Developers

1. Pre Launch Properties

Most of the Developers keep a quota of 5-10% of their project units to be sold to investors at a discount to the launch price. Normally the official launch of the project may be 6-12 months away and the investors get special rates if they agree to pay 50-100% of the value of the units upfront. Before investing in Pre Launch offers one needs to check the stage of the project development, for instance whether land has been purchased and conveyed to the Developer, plans put up for project approval and the present status of the approval. Investing in Pre Launch offers has very high degree of risk involved since the land acquisition as well as the project sanction can get stuck at any stage.

2. Property at Launch Stage

Buying at the launch stage eliminates risks associated with land acquisition and approvals like planning permission, environmental approvals and so on. As such this is a medium risk medium term investment. Townships which are developed over 2-3 phases are ideal for such investment since the developers keep escalating the price for each phase, thereby the investor get a natural appreciation as the project get completed. Here there is a good opportunity to get good price by paying higher value upfront or by forming a group and approaching the Developer to offer a bulk buying discount.

3. Property which is ready to occupy

Buying a ready to occupy unit is a low risk investment. In every place, there are certain areas which have demand for rentals due to factors like proximity to IT Parks, Manufacturing hubs, colleges, commercial establishment etc. Investing in ready to occupy units located in such a place is ideal for good rentals as well as better liquidity since the salability would be easy due to demand from new investors.

4. Plots from Developers

While buying plots from Developers, one has to take precautions to ensure that the plots are being purchased are such that one can get building permission on them, the title is clear and the buyers name would get recorded on the title documents. Investors must take proper legal opinion from an independent Advocate and are advised not to rely on the brand of the Developer rather check out the Developers proven successful projects.

Indirect Property Investments

  • Non Convertible Debentures of realty companies can be good option to earn higher yield ranging from 15-18%. The yields are higher to account for the higher risks associated with the instrument since the interest and the principal repayment is backed from cash flows from real estate project which are prone to fluctuations.
  • Private Equity Funds investing in real estate have become a popular mode of investments for High Net worth Investors. As per SEBI guidelines, the mandatory minimum investment is Rupees One crore per investor, hence this opportunity is available only to high net worth Investors, Corporate Treasuries and so on.
  • SEBI has announced rules for Real Estate Investment Trust (REITs) which will create opportunity to investors to put money into large income generating commercial properties like IT parks, Malls etc. Developers will be able to transfer such projects into trusts called REITs which in turn will do a public issue of units which investors can subscribe.
  • Long Term Bonds For Affordable Housing - To Fund the shortfall of affordable housing in the country, RBI has announced banks to issue long term bonds which are more attractive then fixed deposits.
  • Shares of Listed Realty Companies - There are many Developers which are listed in the BSE and NSE and these companies comprise BSE S&P Realty Index.
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