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 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 hard earned money.
Investment avenues are many. But the investor should be prudent enough to select a proper area, which is safe and secured 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, 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 sentimental and emotional investment.
The liberalization initiated by the Government has opened up the hitherto dormant Indian economy and many multinational companies set up their offices in major metros. The improved pay packets of vast middle class population 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, 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 annual rental returns less property tax, income tax and annual maintenance charges. This return varies according to the type of property residential, commercial or office space. In Bangalore the returns are about 8% for residential, 12% for office space and 15% for commercial space. There are certain determining factors, which play a crucial part in the property investment.
Where to invest? In other words the location. There is equal demand for all types of space in metropolitan cities and market trends are more transparent on 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 say 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 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, restriction on sale for some period and many more laws, 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 which 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.
Type of property: 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 need higher investment
Type of returns: Real estate sector offers two types of returns namely:
(i) monthly return in the form of rentals and the returns on the lease amount invested in the bank securities or in business and (ii) 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 about 8%.
Risk Factor and Limitations of Legal Scrutiny
Tracing the title of the property is the most important step in purchasing the property which has to be done by an experienced advocate well versed in property laws. Property laws are very complex and vary from State to State. Further many times, age-old records need to be examined which may not be available with the parties or even in jurisdictional Sub-registrar's offices. Further legal scrutiny is based on the documents produced for 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 in to 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 tenants but gradually they are being amended to strike a fine balance. But 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 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 very much less 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 patient 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 remotely linked to this sector 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 property market. The available information is too insufficient and often contrast¬ing. 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.
Rental Income
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 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 there from may not meet the maintenance charge even. The investment in real estate is a better option.
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