Property investments are usually investments made for the long term as these are relatively illiquid assets. Generally, investments in the real estate are made for the purpose of rental income, capital appreciation or self use. However, for any investment to give nominal returns, the investor should look at multiple parameters which will enable one to make an informed and safe decision. In the end, when the investor exits the investment, he/she should be happy with the returns or definitely not make negative returns on the investment. Some of the key parameters that an investor can evaluate his property buying decision are as below:
Location: As the saying goes real estate is all about getting the location right. One must consider a good micro-market to make long-term capital appreciation and steady returns on the investment. The location should be accessible, have appropriate infrastructure and have growth prospects. The key to identifying a good location in the right time is to evaluate upcoming developments which will enhance the desirability of the location as well as upcoming infrastructure which will enhance its connectivity with various established areas.
Development Quality: The key to long term capital appreciation is to be part of the development that is of high quality and will retain its value over the long period of time. A development of poor quality looses its attractiveness to prospective buyers and the investor will end up making a negligible return at the time of exit as fewer buyers will want to buy the property. Quality of the asset includes construction quality as well as planning quality. The asset should be efficiently planned with appropriate amenities and infrastructure such as parking and other open spaces.
Financial Strategy: This is probably the most important strategy to invest in an asset. The investor should do enough market research to evaluate if the entry price of the asset is in-line with the market prices for other similar assets in the location. In addition to pricing the investor should also take into consideration the transaction cost that an investor ends up paying while purchasing an asset. Taxes such as stamp duty and registration fees are not reimbursed by the buyer on exit. Hence, these costs have to be covered as part of the return. Above all taxes such as GST are not applicable on ready real estate inventory, hence, the investor should take into account such considerations. The key to maximize the return is also to ascertain what capital mix is to be used to make the asset purchase. In a market like India, where interest rates have declined, the investor should consider using appropriate financing methods to complete the purchase of the asset.
Steady Cash Flow: Investors should focus on assets that offer good rental income. Regular rental income is a driver of great returns on investment. Rental income together with capital appreciation can help an investor generate much higher returns than a regular investment. Normally commercial assets offer better rental returns than residential assets in India. Normally, rental income from a commercial asset also acts as a hedge against inflation. An asset with rental income is also much easier to sell.
Long Term Vision: Real Estate capital appreciation happens over a long period of time as it is a function of various market factors. Factors such as development of road and utility infratructure improve the connectivity of the location as well as improve the standard of living of the location. Development of social infrastructure such as schools, hospitals and leisure amenities also play a huge role in increasing the demand of the location which reflects an increase in the price of the location. All these developments take a while to realise and establish the increase in capital value of the asset.
The above strategies will enable a prospective real estate investor to make an informed decision and help one to achieve better returns on his investment. It is needless to say that any investment is further subject to due diligence by the investor as the property with a poor title can completely sink the investor’s capital. Therefore, investor’s should keep in mind all the parameters when it comes to vetting the title of the property before making an investment.
The article is authored by Nitesh Punjabi, General Manager, Capital Markets and Investment Services, Colliers International India.