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Real estate: Look before you leap
Mon, 20 May Pre-Open

A recent article written on ValueResearch's website compared how the trends and models in the real estate sector have changed over time. Earlier, real estate prices moved up as and when the regions developed - right from barren land being made accessible by building physical infrastructure (for accessibility) to construction of residential properties being followed by commercial properties being set up. All these steps would lead the region to become more popular and eventually more populous. These visible changes would lead to gradual process of witnessing more demand and thereby higher prices. The periodic booms and general inflation would also act as catalysts for upping the property rates.

However, according to the author the trend is different in present times. The builder seems to benefit from majority of the model - right up till the point of commercial properties being introduced in the region. As such, the only price appreciation that investors would have to look forward would be related to periodic booms (such as now) or general inflationary trends.

Bubble or exception?

Real estate in India continues to defy the laws of gravity. Despite the world going through one of its worst crises in about a century, prices have not corrected. With the same happening, the asset class seems to have only become more desirable and 'safe' in the eyes of investors. Many believe that real estate prices in India will never decline. Their arguments seem to be based on the run up in prices over the past years.

Given how the prices have held up during difficult times (past five years), one would not be blamed to think so. But it must be kept in mind that there are some anomalies being seen as well. A key one being realtors holding on to high prices. That too during times of lower sales. As was reported recently, property prices in Mumbai rose by 2.9% during the last quarter to a record high despite slowing sales. But with the capital getting stuck in working capital how are companies able to free up cash? The answer lies in the prevalence of black money in the system.

Better safe than sorry...

What is worrying is the fact that salaried people have been looking at this sector as an investment - looking to buy second home (as an investment) by taking on long term loans at interest rates in the low double digits. And it would only be called speculation when they think that they would sell of the property on possession and pocket the gains. This would be a dangerous thing to do we believe.

In case of individuals looking at renting out properties, it would be important for them to consider the rental yields (annual rent divided by purchase price). Anything in the lower single digit region clearly indicates towards a bubble - as was told to us by the management of a real estate firm.

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1 Responses to "Real estate: Look before you leap"

Kirandeep Atwal

May 20, 2013

leverage in
any kind of
investment is
not prudent.
You have to be
wrong once and
you will wipe
out all of
your saving.
Money gives
returns if it
is compounded
for 20-25
years. But, by
leverage, you
will be
bankrupt long
before 25

Equitymaster requests your view! Post a comment on "Real estate: Look before you leap". Click here!

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