Go beyond festival discounts if you are planning to invest in a property

Developers have started offering discounts and freebies on residential properties as we get closer to the festival season. The most common is a waiver of goods and services tax (GST) of 12 per cent. On a property of Rs 5 million, it’s a straight saving of Rs 600,000. In some instances, the developers are even willing to bear the stamp duty and registration charges, which are another 5-7 per cent. Then there are flexible payment schemes and even freebies such as gold, modular kitchen and air conditioners.

The discounts and schemes are similar to those of last year, but they are steep, according to real estate experts. “For end users, it makes sense to buy a home now. But if you are looking to invest in residential property, it’s best to wait for some time instead of taking the plunge now, despite the offers,” says Ravi Ahuja, senior executive director, Mumbai and developer services, Colliers International India.

For investors, the market is still uncertain. There’s no clarity on whether the prices will hold steady or they will rise further. Experts suggest that investors should look at real estate once the elections are over and there’s more certainty in the economy.

Red light for green shoots: Investors should look at putting money in real estate once sales start recovering and there’s a clear upward trend. A few reports state that sales are better than those in last year, suggesting ‘green shoots’ of recovery in the sector. But property consultants say that the data is relative – it may look better than the same quarter last year but is nowhere close to what it was three years ago.

Also, the number of units sold could be high compared to last year but prices have not moved up. Before investors take a plunge in the residential market, they should ensure that there has been steady price rise for two quarters. 

Property consultants don’t expect high appreciation anytime in the near future. “That is because a lot of supply will come once the Real Estate (Regulation and Development) Act, or RERA, stabilises. I expect a lot of developers who have land to start launching. Moreover, a lot of the demand in the affordable segment is satisfied by Prime Minister’s Awas Yojana,” says Ankur Dhawan, chief investment officer, Proptiger.com. 

Your investment can go into the red: Property consultants feel that despite the number of transactions having gone up, prices may take at least two years to rise quarter on quarter. Suppose you invest Rs 10 million in a house, and the prices remain stagnant in the first year or move up just 2-3 per cent, your inflation-adjusted returns will be negative. You will be better off investing in a low-interest-yielding bank fixed deposit rather than investing in a house for that one year.

Prices have shown negative growth over the past three-four years. Investors who entered the market during this period would have seen a negative investment return. The discounts offered now may also remain in the near future until sales pick up and developers are able to hike prices. It means availing of the discounts may not lead to positive returns either. 

Lower returns, longer horizon: Real estate is now a long-term investment avenue. “Investors with enough patience and a long-term horizon of five-six years can enter the market as long as they have chosen their developers, projects and locations astutely,” says Anuj Puri, chairman, ANAROCK Property Consultants. Puri says that in an environment of subdued sales, rent can fetch steady returns until such a time as capital appreciation begins to take off in earnest. Rental yield in India at present is as low as 2.5-3 per cent.

Despite the negatives, if an investor is looking at property, Puri says, he will need to focus on cities, and specifically on areas within these cities with a lot of employment generation and total residential demand, and on smaller-configuration budget homes because these are currently in highest demand.

Flexible payment scheme can work: In the current environment where everything is against investment in residential property, a flexible payment scheme can work for the investor if he is buying the property without taking a loan. In these schemes, the buyer needs to pay 5-10 per cent of the cost upfront and the remaining on delivery.

But such projects can also put you at the risk of project delays. The investor, therefore, needs to select a developer with a track record and preferably having the backing of a conglomerate. In such a case, discounts can come in handy. 

“We expect select launches/new inventories largely as part of existing projects where new towers/units may be opened up,” says Anshul Jain, country head and managing director, Cushman & Wakefield India.

If a reputed developer comes up with an additional building in an existing project with a flexible payment scheme, it can be a good option to explore.

But look at discounts as secondary. First, zero down on the project that you think will offer growth in the long term. If the developer is offering freebies, taking a cash discount of that value makes more sense for an investor.

After the rupee depreciation, many non-resident Indians (NRI) are also coming scouting for investment opportunities in the property market, according to consultants. Experts say that even for NRIs waiting a bit longer — until elections are over — may be a better option.

Look at commercial instead: If you are looking to invest in property, putting money in the commercial real estate would make more sense at present. Demand has picked up in the commercial space, and especially for co-working spaces. Price appreciation, as well as yields, are better.