Gold rush

The real estate sector has emerged as one of the biggest areas of personal investment in India.

ARUNANGSU ROY CHOWDHURY

Apartment complexes on the periphery of Kolkata. Real estate in India is booming, and currently there are no indications of a bust or downward slide.

Land is the new gold. Recognising this reality, more and more people are investing in real estate. The increasing number of listed real estate developers and companies bodes well for investors.

Not so long ago, buying land, an apartment or a house was done mainly for personal use. The demographics changed, incomes became higher, purchasing power took on new trends, and customer-friendly banks and housing finance companies mushroomed. All these, coupled with reforms initiated by the government, made the real estate sector emerge as one of the biggest areas of personal investment in India.

Investment in real estate could be broken into several segments: Individuals who buy residences for personal use; those who buy houses to rent them out; and those who buy commercial or retail property for own use or for rental purposes. And, with several real estate companies getting listed, various funds have been investing in these companies – once again benefiting the individual.

With the government allowing 100 per cent foreign direct investment (FDI) in the real estate business in 2005, the sector has seen massive infusion of funds. Essentially, the reform process amended the real estate laws to allow FDI in the industry. Believed to be done to meet the demand for commercial and residential real estate in India, the amendment has encouraged several large financial firms – domestic and international, and private equity funds – to pump in substantial sums through funds and into projects.

Several well-established Indian institutions such as Housing Development Finance Corporation (HDFC), ICICI Venture and Kotak Mahindra have already announced that they will be launching funds to invest in real estate. In fact, HDFC, in association with SBI and ICICI Venture, has already launched a real estate fund. A real estate analyst says it is estimated that the combined investments by various groups in the Indian real estate market could go up to $1.5 billion. And funds are looking at returns of around 16-20 per cent, which naturally will benefit the investor.

According to a well-known real estate agency, there is a shortage of 19.4 million housing units in the residential sector. Of this 6.7 million are in urban India. Commercial space is hugely sought after because of the rapidly growing outsourcing and information technology (IT) industry. It is estimated that the demand from the IT/ITES sector will be about 150 million square feet by 2010. Apparently spurred on by this demand, developers have been buying, constructing and selling residential and commercial properties in huge numbers. Yet they are still not able to meet the demand.

An analyst in the agency says the boom in the sector has been so appealing that real estate has turned out to be a convincing investment compared with other investment vehicles such as capital and debt markets and the bullion market. The main attraction in investing in realty is that it offers a possibility of steady income yields, tax structuring benefits, moderate capital appreciation, and higher security in comparison with other instruments.

Realty website mumbaipropertyexchange.com has done a comparison of different instruments available for investment (see table). Although returns are quicker and some times higher in some areas, the website says that people have begun to believe that real estate is a safe and lucrative investment option.

Moreover, in this booming market, individual sellers have also been benefiting as real estate prices in almost every urban area have gone up manifold. For instance, if a property was sold for Rs.1 crore in 2004, it would have doubled by 2005 and today is selling for close to Rs.4 crore in the South Mumbai region. Of course, Mumbai’s prices are amongst the highest in the world and are not indicative of the rest of the country. Yet, real estate brokers say it is a “seller’s market” everywhere.

Delhi and Bangalore are the other two big real estate investment cities. Chennai and Hyderabad come in close after these cities. Brokers say that non-resident Indians (NRIs) as well as those in India are looking to smaller cities such as Jaipur, Mysore and Chandigarh as options to invest in.

Goa is also witnessing a big boom in the realty market. The tiny State has the advantage of selling to foreigners and prices have sky-rocketed. While the local people have benefited, unfortunately there appears to be no vision for development and infrastructure in Goa. As a result, the beautiful State is in danger of losing some of its charm.

Suresh Thakur, an NRI businessman living in New York, says, “India is the hottest destination to buy land. The economy is steady and the country’s potential to be a global powerhouse is emerging. So it would be wise to buy now.” Thakur has bought apartments in Jaipur and Goa. For now he is happy to earn a rent but at a later stage he would like to use the Goa apartment for himself. This is what makes his investment sensible; at some point one can enjoy the house as well.

While NRIs may have deeper pockets than Indians living in India, according to Anjali Shah, a real estate agent, even resident Indians have realised that a good income can come from a steady rent. “We are finding many requests for not only residential properties but even commercial and retail properties. People have realised that while investing in the stock market is a quick way of making money, it is still temperamental. But with the ownership of land they will always have a steady and controllable income,” says Anjali Shah.

Furthermore, investments in commercial properties leased out to multinationals can be money-spinners in a short span of six years.

Another interesting aspect of real estate, which could help tremendously in personal finance is “rent discounting”. The tool allows an individual or company to raise money through the ownership of real estate. For instance, if an apartment has been rented out for Rs.20,000 a month and the owner needs a large chunk of money for, say, a wedding or an emergency, he/she could approach an agency, which works with rent discounting. The agency would give them a loan for a certain amount. The rent that the individual gets would be used to pay back the loan.

With rent discounting, you could utilise the amounts recovered to spin off a property investment or pay off an existing loan against an existing property and within no time an individual or company could be owners of several properties.

Housing loans have become easier over the years. Although interest rates have increased and fluctuated from time to time, they have nevertheless remained affordable enough to encourage people to buy property. At present, they average around 10 per cent on the fixed and floating rates. The rates were lower a few years ago. Yet, even with the increase, the rates are reasonable after factoring in tax benefits.

PRASHANTH VISHWANATHAN

An empty lot outside the Bandra- Kurla Complex in Mumbai. Real estate prices in almost every urban area have gone up manifold and Mumbai’s prices are among the highest in the world.

Although most banks advertise and publicise their service of providing easy and smooth home loans, sometimes it is not as easy when it comes down to applying for one. Several multinational banks are so dogged about documentation that the delay leads to the property getting snapped up by another buyer. Obviously, every care will have to be taken before providing a loan, yet the amount of promising in the advertisements and what actually transpires when a loan is applied for is very frustrating, says an individual buyer of her experience.

Analysts say it is unlikely that the market will slow down. Real estate in India is booming and currently there are no indications of a bust or downward slide. These are a few reasons why investment will continue to flow into India – it is an ever-growing economy with 8.1 per cent growth recorded in the last financial year. India is going to produce an estimated two million new graduates from its various universities during the year, creating demand for 100 million square feet of office and industrial space.

Real estate investments yield high dividends in India. About 70 per cent of foreign investors are making profits and 12 per cent are breaking even.

Even without the current new trends and reasons for investing in real estate, the fact remains that land has always provided a finite resource. Undoubtedly it is the new gold. Hopefully, like gold, every Indian will be able to own a bit of it. •

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