Real Estate has been considered as one of the Investment options. How does it compare with other investment options? Real estate carries more risk than most other investments due to lower liquidity and a very high degree of speculative interest. According to projections by ASSOCHAM, retail and real estate sectors in India are expected to grow at over 30% qnd 40% respectively in the next 2-3 years. The market size of the real estate sector is currently estimated at US$ 15 billion.
In India the real estate boom took off in 2003 on the back of very low interest rates and low prices. However, the situation has changed now with realty prices going up 3-4 times, while interest rates are 60-70% higher. Incomes have certainly not grown four-fold in the past four years. The prices currently being quoted are simply atrocious. The question that bothers a lot of prospective home buyers is whether they will miss the bus if they wait any further. However, the right question should be: Can I afford to buy a house today? Unfortunately there is no index for the real estate market which allows us to measure the returns accurately.
The stock markets have historically moved ahead of the realty market. Stock markets have already entered a bear phase and realty sector is showing signs of weakness. Are we heading towards a crash in the real estate market? The ground reality is certainly pointing towards such a situation. Rising interest rates have lead to a slowdown in demand. Speculators are exiting the markets. The tightening policy initiatives of RBI have left little money for real estate development. The developers have finnced their projects through expensive private equity and are now feeling the heat. According to industry estimates over Rs. 8000 crores of real estate projects covering over 40 mn. sq. feet are facing delays, leading to cost overruns. And there are no genuine buyers at these rates.
Just like the Price-Earning multiple (PE) decides the worth of a stock, Price to Rent multiple is relevant for deciding the worth of a real estate investment. If you invest in a 2/3 BHK flat in Suburban Mumbai/Delhi NCR for 1.00 cr. ( priced at Rs. 30 lacs 3-4 years back), the expected rental would be around Rs. 25000 per month, which gives an annualised return of 3%, which is not even sufficient to cover your interest cost, assuming that most of the realty transactions are financed through banks. And you still think that you will find a buyer for this property if you wish to sell. Isn't it a bubble in the making?
Delhi Development Authority (DDA) has recently come out with a scheme to sell around 5000 flats through a draw of lots, and is expected to collect over 5,00,000 applications. Most of the applicants are speculators applying with the sole purpose of reaping allotment gains after 3 months. This reminds me of the Reliance Power IPO which was oversubcribed 72 times, and what happened to it on listing is history now.
Like in the stock market, it pays to be patient in the real estate market too. For realty market to sustain itself, there should be a steady inflow of end-users. Speculators and investors can only take it to a certain level. End-users can only come when prices are affordable and for that at least 30-40% correction is a must. If you are planning to buy a property now think twice before making a final decision. It may be a bubble waiting to burst!
3 comments:
PRICES ARE ALREADY CRACKING, MOREOVER IT IS DIFFICULT TO LOCATE GENUINE BUYERS.
With prices crashing in US, UK, Europe, Singapore and Dubai, India Cannot insulate as the Prices have risen 3 to 4 times in the last 3 years. So it is obviously heading for a downturn. The bubble will burst shortly. R. G. Murthy.
Its really good to find information about real estate on your blog. It has been of a great help to me. Thanks for sharing.
Regards
Luxury Apartment In Ncr
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