Saturday, 1 March 2014


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 to save some portion of 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 have unfolded many more areas.The investment has become very complex which has led to the emergent 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 considerable amount. It is not only financial but also sentimental, emotional investment.
The liberalization initiated by the Government, opened up the hitherto dormant Indian economy and many multinational companies set up their offices in major metros.The improved pay pockets of vast middle class population offered as many investment routes. With a desire to own a roof over their head as early as possible,the migration of rural people to urban centers 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 speculative and artificial price spiral, which resulted in crash of real estate market in later half of 1990.But now the market has regained its potential. Only serious vendors and end-users 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 office space. In Bangalore the returns are about 8% for residential, 12% for office space and 15% for commercial space.They are certain determining factors, which play a crucial part in 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 rates are more transparent on account of competition and frequency of deals.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.
Amount of investment: Investment in real estate needs higher amount and the minimum entry level will be in multiples of lakhs about 15 lakhs for residential and more for office and commercial space.
Time factor: The sale of property requires long time for finding a suitable purchaser and complying with legal requirements, further the appreciation of capital value of the land is slow but certain and stable unlike in stocks and debentures.
Statutes Local Laws: The realty investment calls for more discretion and involves complicated process like title verification, land use according to local laws, floor area ratio restriction on sale for some period and many more unexpected laws, rules depending upon the political environment.
Tax factor: Uncertain tax rules, rates which vary every year need to be considered.Property tax isan 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 the 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 the 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: Recurring is monthly return in the form of rentals, or the returns on the lease amount invested bank, securities or in business.The other type is return 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% where as the residential property yield about 8%.
Risk Factor and Limitations of Legal Scrutiny:Tracing the title of property is most important step in purchasing the property which has to be done by an advocate well versed in property laws and well experienced.The property laws are very complex and varies 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 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 concerned departments. The honesty and integrity of the seller is very important. Certain hidden facts like pending cases, prior agreements, 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 to cash unlike stocks, deposits.However the property is most sought security for bank loans and rents may be securitized by obtaining loans from the Banks. Maintenance charges: Property needs periodical maintenance, which involves 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 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 of 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 the 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 downwards for time. But this cycle is long-term trend. Though the investment is huge, the investors needs to be patient to have good returns which takes long time.  It would be suicidal to expect appreciation in short run.Two components, the building and land move in opposite directions, the building value gets depreciated and land value gets appreciated.
Other factors: Some factors remotely linked to this sector plays crucial part/role in determining the price. Introduction of one-way traffic construction of flyovers near the property decreases the value of the property. Vaastu nowadays has become important.Another area of concern in want of information in property market.  The available information is too insufficient often contrasting. Even the transactions recorded in registrar’s office will not reveal the real price of the property as amounts other than what is mentioned in the documents might have involved.
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 case of bank deposits, the value of the money deposited gets eroded on account of inflation. The investment in agriculture properties and farm houses are not remunerative. The income from the Agricultural property, is seasonal and depends on weather and climatic conditions.Further, the sale of the Agricultural properties has many restrictions. The farm house demands good maintenance which proves costly as at many times the income may not match the maintenance charges. The investment in real estate, is a better option.
The real estate is only sector which yield better returns apart from capital appreciation, provided the investor is prudent and have taken enough precautions.

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