Man does not live only
for food, cloth or shelter or for himself. He has certain social
responsibilities to provide for his family and also for himself in his old age.
This naturally makes him save some portion of his earnings and invest in
lucrative portfolios. After the basic needs of food, cloth and shelter are
fulfilled he strives to improve his standard of living and to enjoy the fruits
of his hard earned money.
Investment avenues are
many. But, the Investor should be prudent enough to select a proper area, which
is safe and secure, with assured reasonable returns. Earlier, the Bank
deposits, stocks, mutual fund, insurance policies and bullion were most opted.
With increased business, globalization of economy has unfolded many more areas.
The investment has become very complex which has led to the emergence of specialized investment Advisers.
Bank deposits, insurance
policies and mutual funds have become unattractive because of low returns and
failure of many companies. Stock market is unpredictable and volatile.
Moreover, these investment avenues are for short-term which need close
monitoring. Further, the quantum of investment is generally small.
In recent, past real
estate has emerged as a safe and high yielding investment opportunity. Investment
in real estate is a long-term investment and needs a considerable amount. It
is not only financial, but also a sentimental and emotional investment.
The liberalization initiated by the Government has opened up the hitherto dormant Indian economy
and many Multi-National Companies have set up their offices in major metros.
The improved pay packets of vast middle class population have opened many
investment routes. The desire to own a roof over their head as early as
possible and the migration of rural people to urban centres in search of
assured income jobs has further expanded the real estate market.
However, as the demand
exceeded supply, many fly by night operators appeared on the stage and indulged
in speculation and an artificial price spiral, which resulted in crash of real
estate market in latter half of 1990. But now, the market has regained its
potential. Only serious Vendors and Endorsers are operating in the market.
The yield in the
realty market has to be calculated on the capital invested and the annual
rental returns less property tax, income tax and annual maintenance charges.
This return varies according to the type of property i.e., residential,
commercial or office space. In Bangalore, the returns are about 8% for
residential, 12% for office space and for commercial space 12 %. There are
certain determining factors, which play a crucial part in the property investment.
Where to invest? In
other words it is location. There is equal demand for all types of space in
metropolitan cities and market trends are more transparent on an account of competition and frequency of dealings. But, smaller towns have potential of
increased returns because of dearth of space. Local politics also plays its
role in determining the returns in small towns.
Huge Investment:
Investment in real estate needs higher amount and the minimum entry
level will be in multiples of lakhs, it would be about Rs. 20 lakhs for
residential and much more for office and commercial space.
Time
factor:
The
sale of property requires long time for finding a suitable Purchaser and for
complying with the legal requirements. Further, the appreciation of capital
value of the land is slow but, will be certain and stable unlike in stocks and
shares.
Local
Laws:
The
realty investment calls for more discretion and involves complicated processes
like title verification, land use
according to Local Laws, Floor Area Ratio (FAR), restriction on sale for some
period and many more Laws and rules depending upon the political environment.
Tax factor:
Uncertain
tax rules and rates which vary every year need to be considered. Property tax
is an annual commitment, in which it is being increased every year by self-assessment
or capital based assessment. Rental income also attracts income tax to be paid
annually; sale of property attracts capital gains and purchase invites Stamp
Duty and Registration charges. Property tax & Stamp Duty varies from State
to State.
As
stated earlier, the type of property is also very important. It may be
residential, commercial or office space. The demand and supply position of each
sector needs to be carefully examined. Residential property calls for smaller
investment. Commercial and office space needs higher investment.
Real estate sector offers two types of returns namely:
Monthly
return in the form of rentals and the returns on the lease amount invested in
the Bank securities or in business and
The
other type is the sale consideration on sale of the property. The amount to be
invested also depends on the mode of returns expected. Generally, leasing of
property is attractive only for business people. Lease amount does not attract
interest. Commercial property and office space yield high returns to the extent
of 15% whereas the residential property yield is about 8%.
Tracing
the title of the property is the most important step in purchasing the property,
which has to be done by an Experienced Advocate who is well-versed in Property
Laws. Property Laws are very complex and vary from State to State. Further,
many times the age-old records needs to be examined which may not be available
with the parties or even in the Jurisdictional Sub-Registrar's Offices. Further,
Legal Scrutiny is based on the documents that will be produced for the verification.
However, it is not the duty of the Advocate to certify the genuineness of the
documents from the concerned departments. Honesty and integrity of the Seller
is very important. Certain hidden facts like pending cases, prior agreements
and Government notification of the property cannot be traced easily by
verification of the documents. However, paper notification about purchase of
property would help to unearth some claims.
Liquidity:
Investment in real
estate cannot be immediately converted into cash unlike stocks, deposits.
However, the property is most sought after security for Bank loans and rents
may be securitised by obtaining loans from the Banks.
Maintenance charges:
Property
needs periodical maintenance, which involves a considerable amount.
Landlord Tenancy problem:
Most
of Indian Laws are pro tenant offering maximum protection to the tenants. But,
gradually they are being amended to strike a fine balance and even now, it
takes much time to evict a tenant, who has defaulted in payment of rents or who
has violated the terms of agreement.
Political Environment:
Government has maximum
control on real estate sector. Sale or purchase of agricultural land has many
restrictions in Karnataka. Land use restrictions exist in many towns. The major
source of revenue to the Government is from the immovable properties in the form of Stamp Duty
and property tax. In case of acquisition by the Government, the compensation paid
is much lesser than the market value.
Price cycle:
It
has been observed that, the real estate has regular ups and downs where the
prices go on increasing for some period and slide down for some time. But, this
cycle is a long-term trend. Though the investment is huge, the Investor needs
to be in patience to have a good return which takes a long time. It would be
suicidal to expect appreciation in short run. Two components, the building and
the land move in opposite directions, the building value gets depreciated and
the land value gets appreciated.
Other factors:
Some
factors are remotely linked to this sector and play a crucial role in
determining the price. Introduction of one-way traffic and construction of
flyovers near the property decreases the value of the property. Vaastu,
nowadays, has become important. Another area of concern is want of information
in the property market. The available information is too insufficient and often
contrasting. Even the transactions recorded in Registrar's Office will not
reveal the real price of the property as the amount other than what is
mentioned in the document might have been paid.
The rental income from
the properties is in the range of 0.5% to 1% p.m. on the investment. Apart from
this income, the value of the property appreciates regularly, whereas in the
case of Bank deposits, the value of the money deposited gets eroded on account
of inflation. The investment in agricultural properties and farm houses are not
remunerative. The income from the agricultural property is seasonal and depends
upon the weather and climatic conditions. Further, the sale of agricultural
properties has many restrictions. The farm house demands good maintenance which
proves costly and many times the income from there may not even meet the
maintenance charge. The investment in real estate is a better option.
Real estate is the
only sector which yields better returns apart from capital appreciation
provided the Investor is prudent and has taken necessary precautions.
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