Wednesday, June 24, 2009

Everyone is an Investor

The real estate industry worldwide differentiates between 'end users' and 'investors' as distinct categories of buyers. 'End users' are those who buy property in order to occupy it themselves and 'investors' are those who buy property to earn from it (by booking profit when the rates appreciate or by leasing the property for regular income)

It is widely believed that what these distinct categories look for in a property purchase is equally distinct.

One needs to appeal to the heart and the senses of 'end users' as it is believed that the property buying decision is an emotional one for this category. Little wonder then, we see so many properties being positioned as tranquil, ticket to happiness, path to a better & more desirable/up market lifestyle, key to the family’s togetherness and so on and so forth. All emotional messages.

When talking to an investor the message sees a drastic change. You will hear phrases such as ‘value for money’, ‘high potential for price appreciation’, ‘low risk investment’ etc.
Messages meant to appeal to the grey cells and an individual’s rational thinking. No room for emotions here.

However, if we analyse motivations to purchase property closely, it is apparent that they are not very different for the so called ‘end users’ and ‘investors’.
Purchase of property is a large investment irrespective of the buyer and reason for purchase . It is never an impulsive buy and involves a lot of thought, deliberation and not to forget in-depth research.
Moreover, irrespective of the ticket size of the purchase, be it Rs. 10 lakhs or Rs 10 crores, a customer always looks for ‘value for money’. He/She wants maximum bang for the buck. And even he/she is a buying a ‘first home’, he/she will want to be assured that it is a sound investment which will appreciate in value as time goes by.
Think of the time when you first bought a home, weren't your thoughts on similar lines? Would you have bought the house if it was grossly overpriced and didn’t have any scope for rate appreciation?

During recent times, I’ve witnessed many homeowners worry and lament over the perceived depreciation of their home's market price. When queried on whether they were looking to sell it, they quickly retort with a ‘not at all’ or ‘never’.

So, if all home owners or more broadly speaking, property owners think of their homes/offices/shops as assets, isn’t it time that we in the industry acknowledge this fact and talk in concrete, quantifiable terms rather than in vague sentimental phrases such as ‘Attain Nirvana’, ‘Lead a Celebrity Lifestyle’ or some such..

Tuesday, April 28, 2009

Investing in realty- Is it for me?

Real estate is undoubtedly the oldest and most trusted avenue of investment, apart from gold. Look around and you will know this is true. You probably have old relatives who have never heard of (those who have heard, do not trust) insurance, mutual funds or other such ‘modern’ investment instruments. They have probably invested their life long savings in property and gold, and maybe a bank FD.
However in the last few decades we have been exposed to so many ways to grow our wealth multifold, that we ignored these old, trusted modes of investing and growing wealth in favour of more glamorous, high profile ways of getting rich fast and easy.

And we could do no wrong! Powered by personal finance tips from business channels, pink papers and not to forget self-help books, we invested diligently and saw our wealth grow, grow and grow some more.

When I started working in 2004 (the start of the big economic high) the sensex had just touched 8,000 and when I left my first organization at the end of 2007, it had touched 20,000!!!

But that was the ‘beginning of the end’ so to say. To think of the amount of wealth that has been eroded is migraine inducing. We are scared. And we have been rudely reminded of Newton’s ‘Law of Gravity’. What goes up must come down.

Some of the hottest stocks have been reduced to near zero value. And I think that is the problem with such investments. They are after all a form of ‘paper wealth’ and they do carry the risk of being reduced to just that, ‘paper’.

What all of this has done is restore people’s faith in the good old investments. Gold is probably one investment that has gone against the tide and performed exceedingly well.

However, when it comes to real estate, these are tough times. Prices are rationalizing across the board and people are apprehensive of their investment eroding if prices correct further.

I think these fears arise out of ignorance of the nature of realty investments.

Firstly, I strongly believe that real estate should be a long term investment with a horizon of at least 7 years. So, your investment is not affected by market cycles.

Secondly, people should have rational expectations with respect to their real estate investments. Research suggests, over a period of time, real estate has performed better than any other asset class but people seem to have extraordinary expectations when it comes to property. Yes, its true that there are investors who have doubled and tripled their money in a short time from property investments. However, if you don’t, it doesn’t make it a failed investment.

An investment in property offers the best opportunity to leverage your money. This means only part of the investment needs to come from your pocket, the rest can be financed by a bank (infact a large part can be financed by a bank)

Morever, in a dull market you have the option of leasing out the property which will generate regular income till such time that you can exit the investment on your terms.

Last but not the least, property is ‘real’ or concrete wealth….. No matter how bad the times get, the value of your real estate asset will never be wiped out.

Tuesday, April 21, 2009

The Home Buying Experience

We sealed the deal last month.
Buying a home is an extremely stressful experience. Infact I will go so far as to say that buying a home can be more stressful than getting married!(which is widely accepted as the most stressful experience in one’s life). After all I had known my husband for 6 years before we tied the knot last year.
But if you like a house, the sales guy will know through some weird 6th sense and he will pressure you into signing that cheque as a token of your commitment even while he paints a fairly vivid picture of a family walking through the door in the next 5 minutes ready to snatch your future home from under your noses 

I re-lived the stress, helplessness, confusion, uncertainty, anxiety, not to mention acidity I experienced during my wedding in those excruciating months of house hunting.

What made it even more harrowing was that fact that my husband and I were complete novices in this complex game of property purchase.

We were plagued with doubts. What should we look for when buying a home- affordability?location? conveniences ? comfort? luxury? aesthetics?
All of the Above!!!??

Were we being too choosy? Should we have bought that house that didn’t seem so bad? Is everybody out to fleece us because they could smell our ignorance from a distance??

Well, I am paranoid by nature and the house hunting was not doing me any good.

But when we finally decided on the house we wanted to buy… it turned out to be one of the easiest decisions we have ever made.

I am not sure I can exactly pinpoint the moment the decision was made.

Was it the moment when I walked into the house and was greeted by the sunlight that came rushing through the french windows, or maybe it was the moment when I opened the full length sliding glass doors that led to the balcony and the breeze caressed my cheek, or was it the moment when I walked through the corridor and was amazed by the way the each room naturally led to the other. Or was it the moment when I was overwhelmed by a sense that the person who designed the house knew us intimately and had done everything possible to make sure we were comfortable…to make sure that the space became our own…

10 minutes into the tour of the apartment, my husband and I looked at each other and we knew that we had found our home.

Of course we discussed location, price, distances, conveniences etc etc . They were all factored into our decision. After all this was the biggest financial commitment we had made thus far.

But truth be told, we stretched our budget, we compromised a bit on location (I had never heard of the place before but it is a promising location I hear) and conveniences (the only thing worth reporting in the vicinity is a ‘Reliance Fresh’) ……all for the warm light, cool breeze and sensible, user friendly, intimate design …..

Like they say, Matches are made in heaven. We had finally met ours 

Monday, April 20, 2009

Is that the 'right' price for your dream home?

If you are currently scouting the market to find the ideal ‘roof over your head’, you probably ask yourself this question several times a day.

Home buyers are constantly nagged by doubts such as, ‘Is this house overpriced?’, ‘Seems like a good price but should I try and get a better deal?’, ‘How do I know this is the best deal for me?’

Purchasing property is a daunting task and property valuation is an ever more daunting task.

Moreover, if it’s a home purchase, its not a purely financial deal, complicating matters further. Right?

Developed real estate markets have clear methods of determining what is called, ‘fair market value’. Also, the variation in prices of property in a particular area is not much making it easier to determine the price of property.

However in fairly underdeveloped and disorganized real estate markets such as India, this is not the case. The extent of variation differs from time to time depending on market conditions. It can be 25% or even as much as 40-50%.
This because various factors such as:

-Age of construction:
According to me this a crucial factor. Unlike developed markets such as New York and London, the difference between old and new property in India is huge resulting in an equally large variation in their prices.
Maintenance of old property in India is very poor resulting in fairly quick depreciation in value. Moreover, earlier there was no concept of value adds and amenities and most residential properties were plain vanilla stand alone buildings.
As against this, a new property comes with the latest amenities and add ons.
Most people are ready to pay a premium for the latest construction and amenities.
Is it any wonder then that there is a considerable difference in price between an old and new property, despite being of the same size & being in the same location?

-Quality Parameters:
Again a very important factor.
This is owing to the fact that the Indian real estate market is disorganized and extremely fragmented.
There are many players, with more entering the market everyday. Moreover real estate is a very local game here and hence there many players who are restricted to a state, city/town and even suburb. There are barely any national players currently in Indian real estate.
This level of fragmentation allows for novices and unscrupulous elements to enter the market hoping to make a quick buck. As they are not in this for the long haul, they try to enhance their profitability by using low quality material and poor quality of construction. They are what I like to call ‘Hit and Run’ players.
Then there are those who believe in building a trustworthy brand and leave no stone unturned to create the best possible product. They use the best raw materials and employ the latest construction technology apart from ensuring that their design can compare with the best in the world.

Then there those who make average buildings with average raw materials and design for average prices.

Consequently the prices charged by developers vary substantially depending on the quality & design of the product

-Reputation of Developer

You can’t ignore this if you are buying property in India. For reasons as stated above, there is a premium attached to the reputation of the builder.

Unlike in the case of many other products that you buy as a consumer, your relationship with the developer will last for many years after purchase of the product and you will probably live in that house many years to come.

Hence it is crucial that, the developer is not someone who thinks that once the apartment is sold you become a ‘closed file’. He should believe in cultivating lifelong relationships and must continue servicing you long after there is very little tangible ROI. And since property has to last you a lifetime, there must be assurance that there are no cracks on the wall and leaks in the bathroom within a year of possession!

Developers spend years dedicatedly serving the community and building their brand before they are able to reap benefits in the form of a premium on their products. And I fail to understand why consumers grudge them this.

You never question why a ‘Louis Vuitton’ hand bag costs Rs 1.5 lakhs while a local brand will sell you a similar looking product for Rs 500. Why is it then that consumers expect all properties in the same location to be priced exactly the same?

-Product Differentiation

Again a largely Indian phenomena. You will find products in the Indian real estate market that fall in any of the following categories: Economy, Premium, Luxury, Super Luxury, so on an so forth.

Products in each of these categories come with differences in configuration, specifications, amenities etc and hence are priced differently.

You need to take into consideration all of the above factors before you decide if the property is priced right.

Tough, right? Well, it can get even more complicated. The Indian real estate market is plagued with ills such as lack of transparency, no fixed price and arbitrary fluctuations in price that make it even more difficult to determine the right price for property.

Can you get any help whatsoever in this seemingly Herculean task?

Well many believe in seeking the guidance of an experienced and trustworthy real estate agent with local expertise to take a call on whether the pricing of a property is right.

Some engage the services of a property valuator who can do a valuation based on factors such as age of construction, quality of construction, amenities, location etc.

There are many resources available online that can be of help.

But despite all of the above, the truth remains that the value of a property is what buyers are ready to pay for it.

So when buying a home, don’t let too many external factors cloud you judgment.

Factor in the considerations given above and just ask yourself if the home is the right fit for you and your family, can you see yourself making a home in the property and most importantly, can you afford it? If the answer to all of the above is yes, then you have found your dream home.

Don’t worry too much about the fluctuations in price and never try to time the market (wait for prices to fall before buy). When it comes to the stock market and the real estate market, not even the biggest expert can accurately judge when the prices have bottomed out or peaked.

Be your own judge. Happy Home Hunting!