Mar 2021
24

Understanding Real Estate as an Asset buy

By Rohit Garodia, Managing Partner, Pecan Reams
243

Real Estate assets are purchased typically for:

  1. Home or office for own use
  2. Property purchased for the future
  3. Purchase made as an investment 

Home or Office for own use:

It is never easy to build a home in Mumbai over one lifetime they say. But while buying a property, the focus should be on buying something you like and want to use rather than settling for the best possible price. This is important as the spending on purchasing property is a large percentage of their total net worth for most people.

This is part of a net worth that is typically not available for any alternate use and is money locked in. Self-employed/business persons often allow their personal property to be mortgaged for monies they borrow for business. This should be avoided.

Typically, a home or office for own use is never sold. If sold, it is done as up-gradation after having been bought originally to live in. 

This is probably the best time in the last five years to buy a property for own use as prices are low, the government is offering sops, home loans are at their cheapest levels and developers have lucrative options. With RERA creating transparency and payment options available, the risk of investing in an under-construction asset and delays in completion have largely reduced.

Property purchased for future:

This is typically done keeping children or future needs in mind. These are property where one has planned long-term ownership/use. This is not really an investment. This is also long-term money invested in a property that will not really get liquidated or be used to sell & reap a profit. This would be a way for people to park money for future use. 

Purchase for Investment 

Real estate as an investment class is buying property to make money on it or gain particular returns on it. This can be segmented into:

  1. Land: They say, ‘Land will always appreciate because God has stopped making more of this.’ Owning land has been seen as the best way to make real estate investments and may continue. People buy in acres, sell in square yards / sq. ft. Buy as Bungalows, sell as individual floors in a building. Liquidity is harder as it takes time to exit, but the growing Indian infrastructure and the lower prices make a lot of sense for people to buy land. 

 

  1. Rental Commercial Property (Shops / Offices): A great investment class for stable rent returns, a welcome substitute income. Getting rental income is on people’s minds after having invested for own or future use. It does come with the risk of being able to rent out a property, working along with the tenants, managing the property, and rent collection. Modern-day REITs have become a good alternative way of ownership of rental assets. The returns are also similar to the direct ownership of properties, no hassles in property management, and offer great returns. 

 

  1. Residential property: Residential real estate either completed or under construction is not priced in a manner where one can expect massive appreciations.  

 

  1. Completed property: Pricing has also witnessed a dip. However, returns on completed property is not high since residential rentals are in the bracket of 1.5-3% per annum.

 

  1. Under-construction Property (Residential, Office, Retail): Prices dropped at an average rate of 5% to 20% depending on location, product, developer, and associated factors. One should not expect short-term returns but there could be natural increment in price as a project gets completed. Overall good time to buy this.

 

The current property prices make completed or under construction residential property a very good avenue to park money gains from the equity markets. 

 

Asset Class

Synopsis

Performance until 2010

Performance since 2010

Outlook

Land

  • Great long-term returns
  • Less liquid

All saw high Capital appreciation

High Capital appreciation

Capital appreciation has not been much

Should see good appreciation here-on

Shops Rental

  • Rent returns from 3-5% per annum
  • Capital appreciation limited

Have done better than the other asset classes

Already at peak in most locations. Should see moderate appreciation

Office Rental

  • Rent returns from 4-7% per annum
  • Capital appreciation limited

Decent appreciation

Appreciation is very location dependant. Prime CBD should do well.

Residential Completed

  • Rent returns of 1.5-2.5%
  • Capital appreciation limited

Decent appreciation

May see moderate appreciation

Residential Under-construction

  • Rent return post completion

Amongst the worst impacted in terms of appreciation

Should see good appreciation given prices are low

 

About Author

Rohit Garodia Managing Partner, Pecan Reams
Articles 1
Updated: 24 Mar 2021
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