We’ve all heard that the Budget has a lot in store for the realty sector. The buzz is there will be a lot of action in this market between five and 10 years from now. You can profit from investing now, but the invariable question is what to buy and where? Should you bet on integrated townships or small projects, plots or readymade apartments? In big metros or tier-II cities? Follow these five strategies and you won’t be let down.
Tag on to townships Integrated townships are large projects that come up in a planned layout with readymade infrastructure for education, healthcare, shopping and entertainment. These projects tend to be better managed and more self-sufficient than standalone blocks.
When you buy a home in a new neighbourhood, basics such as power, water, sewage and roads can turn out to be grossly insufficient. This is because, unlike countries such as Singapore, in India, property developers are quicker to foray into new localities than town planning authorities. Civic and social infrastructure is seldom in place before a locality develops.
In an integrated township, the planning part is handled by the developer. In a large project spread over 20 acres or more, the developer takes a holistic view of the facilities required within the township with an eye on affluent buyers. Also, features that can lower your maintenance costs — water treatment plant, solar power — are included due to scale. This may not be possible in a standalone apartment block or villa.
The check-list while buying property in a town-ship includes whether the developer has partnered with service providers such as schools and hospitals.
There is also a possibility that even when everything falls into place, the facilities outside the township such as roads and educational institutions are less than what you expected. Getting clearances for large townships is much more difficult than for one-off projects. High-profile projects such as Lavasa near Pune have been held up due to approval issues. Hence, invest at a later stage if you want to play it safe.
Look at low-cost homes Low-cost homes are those that offer all basic amenities and facilities that you expect in housing development at a price point that is affordable to most middle-income families.
When buying a low-cost home, you can hope to pay less but without compromises on quality. One way this is managed is by reducing construction cost and time through the use of new building technology, such as pre-cast aluminium forms instead of bricks.
Budget homes are usually small, 1-2 BHK units, but the design ensures that the space you get is well utilised. For instance, most floor plans tend to avoid corridors. For a given area sold, the carpet area is also typically higher than similar mid-income or premium homes, as the “loading” (ratio of paid area to usable area) is lower. Even with a smaller share of common area, you get standard features such as parks, play area and car parking.
‘Affordable’ is a popular adjective in the property market, but finding genuine value requires some work. For example, you have to assess how well the builder can meet the promise of quality and cost; so be sure to dig into the construction method and delivery record. Also, since low-cost land is available only in peripheral locations, you will find that there are not many infrastructure facilities such as schools or hospitals. You must, therefore, see how liveable the area is and what transport and other infrastructure developments are coming up. Areas where low-cost homes are seeing good traction include Boisar near Mumbai, Attibelle near Bangalore and Sriperumbudur near Chennai.
Buy a plot in a developed layout If you have limited capital, instead of buying a completed home, buying small plots in a developed layout can be an option. ‘Developed layouts’ usually have roads, power and water connections in place as well as common amenities such as parks.
Land can be an attractive investment from a long-term returns perspective. But there are two important concerns in land purchases — legal due diligence and risk of encroachment. Buying a plot in a developed layout addresses these issues. Putting up a layout requires obtaining clearances, such as zoning and local authority approvals; this reduces the legal risk.
You can also get a loan to buy land, but not tax benefits. The interest paid for buying non-income generating land is not tax deductible and the principal paid is not eligible for any benefit. The interest can, however, be capitalised to reduce capital gains tax liability when selling the plot. These are the red signals you need to watch out for in developed layouts. The minimum facilities in this theme are road, water, power, sewage, open space and active security.
Before you buy a plot, you must independently enquire about the infrastructure and other social structures coming up nearby for two reasons. One, these contribute to price appreciation. Two, if the projects are coming up too close to your layout, there is a risk of acquisition by the Government.
You have surely heard anecdotes about windfall gains made by investing in land. But the truth is that not all land parcels turn out to be multi-baggers. Speculation, such as what is witnessed in the Seemandhra region now, carries the risk of capital loss or being stuck with an asset that has no inherent merit. So be sure to look at the fundamental value of the land purchase.
Step up to senior homes If you are getting close to your retirement, homes in a ‘senior community’ may be something to consider. The homes are usually available exclusively to seniors and are typically designed to cater to their needs — as they age from active living to requiring more support.
If you don’t mind relocating after your retirement, a home designed with the needs of the elderly has some merit. For one, the home would be designed with the requirements of the seniors in mind. For instance, the height of wash basins or the layout of the shelves will be such that bending is reduced. Amenities such as gym also have senior-friendly equipment.
You can also expect the community to be self-sufficient with access to medical facilities, shops and entertainment as well. You will also get additional services such as catering and house maintenance. Locations such as Coimbatore, Pune and Bangalore have been popular for senior communities due to their moderate weather. New communities are coming up close to major cities for accessibility; you also have a choice of more exotic locations such as Lonavla, Kodaikanal, Kasauli and Dehradun.
The concept of senior living is still evolving in India, so be sure to clarify on certain important aspects. For example, many of these projects have sale restrictions or may only be available on a ‘lease’ model. So clarify the ownership terms.
Since a senior home is a long-term service contract, find out the provider’s history. You also need to assess the risks of any service partnerships, for example, to run a clinic or hospital. Since many senior communities tend to be in ‘quiet’ areas, check what options for medical and other facilities exist nearby.
Senior homes come with a premium of around 30 per cent to other homes in the area. The maintenance costs in the community can also be sizeable. Not just that, the costs tend to escalate much above inflation rates every year. Do the math on the costs to ensure that your savings will be able to support this.
Invest indirectly You can also invest in professionally managed funds to get indirect exposure to property. Choices are currently limited to real estate private equity (PE) funds, which require a minimum investment of ₹1 crore.
However, you can wait for the newly proposed real estate investment trusts (REITs), which require a minimum investment of ₹2 lakh.
Funds and trusts let you benefit from the property market without the hassles of ownership. One advantage is that the investment risk is lowered for an investor who may not be a property expert. You get the benefit of due diligence when funds invest in a property; they also ensure that the value is retained by proper maintenance; diversify their purchases across geographies and property types, to reduce concentration risk.
Another positive feature is that with these instruments, you can get exposure to properties that may otherwise be out of your reach. For example, REITs let you own a share of income-generating commercial assets.
When you invest in property PE funds, choose a fund based on your risk appetite. While conservative investors may opt for rental income themes, those with higher risk appetite can opt to invest in funds which offer high interest loans to developers or take equity stake in projects.
The disadvantage with the fund route is that you cannot enjoy any tax benefits, which is a major motivator for property investments. And the returns you get may not be spectacular. For instance, the rental yields on office properties are in the 7-10 per cent range and the capital appreciation is around 3-5 per cent. So the total return for a REIT investment is likely to be not more than 10-15 per cent.
While everything looks good on paper, the reality is that most PE funds have not been able to provide high returns, due to constraints on exit. Look at the fund’s investment philosophy and ask about its project evaluation method, details of the risks identified and the mitigation strategy.
Ask the experts
Unlike the past, where your chacha was the resident expert on hot property markets, today, doing objective research is easy, thanks to online resources. Additionally, consultants, both online firms and advisors, work with you personally to guide you on location, price and financing options.
Zeroing in on a home of your choice is also made easy through online property listing sites. Brokers are becoming more professional in the quality and the range of services they offer customers. For instance, many offer help in finding a tenant and handling ongoing tenant relations.
Property maintenance is another area where you find support in handling operational issues. Instead of ‘voluntary’ residence association members who scramble to fix plumbing, professional services are available to handle routine maintenance issues in the apartment complex. Likewise, online portals make collecting maintenance dues easy and transparent. You can also find lawyers and tax consultants who are specialists in the property segment. In addition to banks, many home loan providers help you in performing due diligence on a property.
So, tap this wide array of service offerings and arm yourself with data before you venture into the wild property market, where buyer protection is, unfortunately, very limited.
Also read: > What drives property prices?