Homes & Interiors: Maximum returns, minimum risk

Real estate has gone through a lot in the recent past. It began with the goods and services tax (GST) being implemented, the Real Estate Regulatory Authority Act (RERA) coming into force, and we cannot forget the fallout of demonetisation. Though it’s been close to one-and-a-half years since it was announced, its impact on the realty market was significant.

Through it all, the realty market saw a lull, but Bengaluru seemed to pick things up soon enough. In fact, in a seven-city survey by ANAROCK Property Consultants, Bengaluru was among the only two cities to show an increase in new home supply as well as absorption rates. That being said, investment in property is being looked at cautiously by the buyer. If you are looking to invest in property with the idea of profits, then besides the factors that will convince you to make a good choice, you should also consider the factors that can negatively impact property investment profits.

Do your research

“There is undoubtedly the rising cost of money,” says Anuj Puri, chairman, ANAROCK Property Consultants. “Increasing inflation is the first factor that inhibits the profitability of a real estate investment. While investing in any kind of property solely for capital appreciation, one should always consider what the overall earnings would be worth at the point in time one wishes to liquefy them,” he explains. “If one fails to plan for the inflationary effect, further property purchases may be out of reach — rendering the whole concept of real estate investment an exercise futile.”

To deal with this, a simple method of establishing whether inflation will erode one’s real estate investment is to determine if the interest rate earned on one’s savings is less than or equal to the rate of inflation. If it is, it means that your real estate investment too will suffer because of inflation. If one is investing for both capital appreciation and rental income, it is necessary to establish whether the average price for property rentals in the location one wishes to invest in will remain higher than the rate of inflation in the long term. If it does not, there is not much point in investing in that location.

If one is looking at investment for profits or rentals, then Adarsh Narahari, secretary, CREDAI Bengaluru, points out that today, certain micro markets and specific types of products give the assurance of far greater returns. “In the current scenario, properties that fall within the purview of the Pradhan Mantri Awas Yojana (PMAY) scheme, the affordable housing scheme, but located within a developed area might see the best returns for investors. Location, quality of development, infrastructure and ticket size of the asset are the primary influencing factors.”

Don’t compromise on essentials

A property that lacks infrastructure or the possibility of it in the near future, in terms of well-connected roads, water, power and adequate sewage systems, can lead to a negative impact on your investment. Of course, the accountability of the developer and his ability to deliver quality as promised has a huge say in how your investment turns out.

That being said, Farook Mahmood, president, FIABCI, chairman and managing director, Silverline Realty, believes that the negativity is behind us. “There is no speculative purchase in the market right now,” he says. “There are only actual consumers who are buying residential properties for their own use. Though the cost of construction and taxation slabs have been increased, it’s still cheap to buy a residential property in the current market.”

And speaking of taxes, Puri elaborates that the taxes applicable to holding or transacting property can also have a downward influence on the overall value of an investment property. He adds, “If one is purchasing a property on the basis of profitability on capital appreciation with the intention of earning rental income from it, bear in mind that profits earned from selling a property as well as generated rental income are taxable. It is important to make one’s calculations on not only the profit arising from a property but also on how much of it can be retained after taxes. For inexperienced property investors, it is unwise to invest in a property without first consulting a chartered accountant or an experienced real estate professional. While there is no way of avoiding property taxes, it is certainly possible to make the taxation scenario more realistic.”

With these multiple considerations in mind, Farook believes that this is the right time to buy residential property when compared to last five years. He reasons, “There is excess inventory in certain sectors. Each developer in the market wants to liquidate their stock and thus the pricing is the cheapest at present for residential properties. And day by day, the value is picking up. And the present government policy on housing is reductive. Due to competition among similar products in the market, the prices are good. This period will last till the stocks do.”

Anuj concludes by saying that real estate investors need to be exceptionally clever since various factors can negatively affect the value of one’s real estate assets. Being aware of these and making suitable provisions and allowances for them is an inalienable part of successful property investment.

So, keep these pointers in mind for a good investment with maximum returns.