Huge demand, easy funding, tax benefits, better return, excellent value appreciation and government initiatives contribute in making real estate the hottest sector for investors. Real estate sector has given 10-12% of returns over the past decade and continuously attracting common man. Increased value can mean sale and reinvestment in higher value properties, or provide an equity line of credit to use for other investments.
Easy funding from financial institutions to the Builders, Developers and Investors for construction purpose and recent Government proposals like 100% FDI in townships and housing projects through the automatic route subject to guidelines proposed by Department of Industrial Policy and Promotion (DIPP) is proving an encouraging factor to the already flourishing sector. Meanwhile, the Reserve Bank of India (RBI) has amended the norms for urban cooperative banks for disbursing loans to the housing and real estate (RE) segment. The new ceiling is 10% of the total assets of the bank, which can be extended up to 5% under priority sector lending.
Noida, as a case in point, has emerged as the largest industrial town of Asia. Its close proximity to Delhi and enhanced connectivity with the rest of India through a strong logistic network has been the reason for its paradigm shift in last few years. The appreciation in property prices in Noida is 30% annually thereby earning large capital returns for the investors. New Okhla Industrial Development Authority (Noida), with an exceptional demand for residential units, has been slated to be the most productive investment hub five years down the line. According to India Report survey, job opportunities, businesses, migrations, investment tools are expected to be doubled in Noida by 2014. Noida Greater noida six lane expressway and upcoming FNG project, Taj Expressway linking Agra to Noida, the Asian Development Bank’s meet in Greater Noida merely due to the space crunch at Pragati Maidan in New Delhi, The F1 racing tracks, Night Safari and the latest Noida Greater Noida Metro development and many such umpteen examples are contributing to the rapid price hike in properties.
Real Estate sector provides the above mentioned opportunities but has its own share of pitfalls. The old adage ‘The Devil is in the detail’ holds true here with pros getting overhauled by cons in case the fine print is overlooked.
Assuming there were two investors who had equal amount of money to invest two years back. Mr. X invested in Bonds and shares market and Mr. Y bought a property by investing a certain sum and borrowing some from bank, thinking that within five years they will get double the amount invested. Now, after two years the stock market has moved up around 27% while the real estate investment, has appreciated just 8%. Since the property is mortgaged with the bank, Mr. Y still technically does not even own the house or has made any return. Also if Mr. Y were to sell his property to cash in on it, it would be highly illiquid an asset in the short run. This blocked capital makes cash on the nail easier said than done.
Secondly, corruption is the highest in real estate and the government is aware of that. The process that asks a builder to take approvals from different agencies gives birth to corruption. Every stage involves malpractice. People’s white money is sucked into black economy. Absence of regulatory body unlike securities market regulator SEBI, makes real estate investment like a horse without a rein.
Also the price hike that is visible in the market is more speculative than actual worth of the property. Investing in real estate can be rewarding, but it should be a part of the asset allocation strategy. It cannot substitute the equity or the debt component of an investor’s portfolio. Every asset class comes with its pros and cons; and in case of real estate, its illiquid nature and lack of transparency in pricing can work against the investors. Unlike a mutual fund, gold or stocks, the value of a property cannot be tracked on a daily basis.
According to Financial Times report, “most NRIs lock their capital in property market, instead they should consider more lucrative avenues less explored, for instance investing in debt mutual funds for the long term and in stocks which have a growth potential”.
Yet inhibitions, lack of domain knowledge, lack of money to invest, or simply to avoid risk, people have so far chosen to stay at bay rather entering into such deep seas. These alternative lucrative options are like those black pearls yet to be discovered and it is this caginess that has made real estate sector such that age cannot wither her, nor custom stale her infinite variety.