Wednesday, September 22, 2010

The Rules Of Realty.

One of the more frequent questions I get asked is, “Is real estate going up?” The truth is, I don’t know. But that’s not how I typically answer. Instead, I ask a question in reply: “Why are you asking?” The other question I could ask is, “Over what time-frame?” Those two questions, in short, set my perspective on real estate—the nature of your interest in real estate and your time-horizon. Let me explain.

Real estate in urban India is an excellent investment and will continue to be so. India is one of the least-urbanised countries in the world, but that is changing fast. Urban planners project that Greater Delhi, for example, will become the largest city in the world by 2020. People make more money when they interact with each other, and the infrastructure of cities makes that possible. The desire to move to the cities is virtually universal among our village youth. If you plan to spend the bulk of your active life living and working in urban India, put money down for a home as soon as you can. EMIs and other terms of the housing loan industry will, I hope, ensure that you do not overextend yourself. If you are married, and both of you are earning, make sure that the monthly payments will be covered even if you plan to have a child soon, and one of you then take a longish break from work.

The first house you buy may not be the home you would like to have when your children need more space for themselves; but don’t wait till you can afford that dream home. One or two upgrades in the course of an adult life is par for the course. So, real estate offers great returns. After I have acquired my own home, why not invest in property as a retirement fund? In the best-case scenario, it works. Irrespective of the swings in property markets, thanks to the macro scenario in India, the property will eventually fetch you a good return.

In a growth market like India, unless you pick a real dud, investments in both real estate and listed companies usually pan out, and offer comparable returns. But, price cycles in Indian real estate are pretty long—12 years or so from peak to peak, or fi ve to six from top to bottom. If you need to cash out of real estate when the markets are dropping, fi rstly, you are looking at a substantial loss; secondly, when prices are dropping: you could wait for months before you fi nd a buyer, even when you are willing to take the market price.

The second problem with real estate investments is that they are expensive and messy—expensive because registration fees are high; messy because titles are not clear, real estate developers never deliver on time, and the brokers, the less you say about them, the better. I have been intimately involved with at least 10 real estate deals in the last as many years, and all except one had my blood pressure way out of control. In contrast, want to sell equity worth one thousand, or one crore? Make a phone call or press a key on your keyboard. Within 48 hours, the cash will be in your bank account.

Which brings me to the last point—if you need money, investments in real estate are indivisible. Meaning that, if you have a crore in shares, you can withdraw one lakh or fi fty with equal ease. But, if that same amount is invested in a fl at, and you need, say Rs 20 lakh, you need to sell the property, incur the selling costs on the whole amount, and then fi nd a lucrative way to reinvest the amount not immediately required. In other words, ignore the ups and downs of real estate prices. Buy your fi rst home as soon as you can, and don’t bother to fi nd out ‘What it is worth’.To invest your spare cash, find a vehicle that is less stressful.


No comments: