The real estate market witnessed a buying/selling frenzy in 2006-07 and the beginning of 2008. Foreign direct investment, introduced in 2005, had settled in by then and prices were up 40-50% the actual values. In some cases, prime properties were sold 10 times in a month.
For buyers, any property became worth buying. An upcoming apartment in a distant suburb, a vacant plot, a redevelopment project or commercial or agricultural plots, buyers saw investment opportunities everywhere.
Illustrations by Shyamal Banerjee/Mint
However, there were lessons to be learnt when the tables turned by 2008-end. Average residential capital values fell by 18-20% in March 2009 from the highs witnessed in the first half of 2008 and indiscreet investors burnt their fingers.
Like any other investment, you need to be careful when investing in a property. With prices stable at present, there is renewed buying interest. Here are three deals you should be cautious about.
Owning a farmland in a distant suburb of a city has become fashionable. There are parties to be organized and holidays to be spent; add to it the rural flavour to busy city lives. For instance, Delhi has such plotted developments in and around Faridabad, Gurgaon, Ghaziabad, Sonepat and Greater Noida.
Sensing the trend, realtors are opening new investment opportunities in this category. But there are certain checks you need to run before buying.
It could be an agricultural land: If it turns out to be an agricultural land, you won’t be able to construct any structure on it. At the maximum, you can build a small hutment.
Says Arun Mittal, managing director, Aarcity Infrastructure Pvt. Ltd, a Noida-based real estate firm: “Such investments involve a higher degree of risk as most of these plots come under the agricultural domain and may not be authorized to build any kind of housing.”
Area restrictions: A small piece of land that you buy cheap can’t be a farmland. Every state has an area specification that makes a land eligible to fall into the farmland category. Moreover, in most states, you cannot build on more than 5% of the total farmland.
“For instance, a farmland in Delhi needs to have an area of at least 2.5 acres and you can build on only 5% of the total area,” says Bhim Yadav, chief executive officer, Falcon Realty Ltd, a Delhi-based real estate firm.
High price points: Though these are in far-flung areas, they don’t come cheap. Says Pradeep Mishra, a Delhi-based real estate consultant: “A comparison between the rates offered by the realtor selling these plots and the prevailing rates in the same area suggest that the plots are pitched at slightly higher prices.”
For instance, farmlands across Noida-Greater Noida Expressway are available in the price range of Rs70 lakh to Rs1.5 crore. A normal residential plot in Greater Noida that will give you enough living space may come at a lower price.
Partial selling not possible: If at a later stage, you need quick money and want to sell the farmland, you will have to get rid of the entire land. In fact, if a realtor is selling small pieces of land next to each other, check with the local land records department of the village about the authenticity of the plotted development.
Senior citizen housing
There’s something for everybody. If there are studio apartments for youngsters and bachelors, there are projects to cater to senior citizens, too. Complete with facilities such as 24-hour hospital care and spa, meditation and fitness centres, these are sure tempting.
Services at a cost:Do not associate affordability with the senior citizen tag. With features of hospitality, healthcare and lifestyle, senior citizen homes come at a premium.
Though the basic cost of apartments is comparable with other housing projects in the same area, the occupants are required to shell out extra on a monthly basis. And this adds to the total cost ultimately.
Ankur Gupta, joint managing director, New-Delhi-based realty firm Ashiana Housing, says these houses are higher in value since there are services associated with them. “Basically, it is a lifestyle product and has a business angle too. These are meant for those who can afford the services along with the housing cost,” Gupta adds.
Restrictive clauses: Unlike regular projects, there are some constraints in these. In some of the projects, there is a mandatory stay-in period. For instance, Impact Senior Living Estates Pvt. Ltd, developing flats for senior citizens in Amritsar, has a lock-in period of four years. Exit before this period and pay extra, yet again.
Says Jaivir Singh, vice-president, Isle-Impact Senior Living Estates Pvt. Ltd: “If the buyer exits the project, the occupant will get back his money after deducting a few lakhs from the initial deposit.”
What happens after owner dies: Though the senior citizen home concept comes from developed markets such as the US, India does not have any regulation on the title ownership after the senior citizen’s demise. In other words, 15-20 years hence after the demise of the occupants, the project may not be inhabited by senior citizens at all.
Moreover, the person who inherits the property may not want to pay for the extra lifestyle-associated expenses.
Some developers give an option. They are ready to lease out the property for 15-20 years. Rakindo Developers Project Ltd, a joint venture firm between Rakeen Group of the UAE and Trimex Group of India, has a buy-back clause that would be incorporated in the sale deed.
Location disadvantage: Most of these projects are situated in the suburbs of metros and tier II locations. Being far from the main city, the location may not offer you other amenities apart from what is available within the apartment complex.
Also, even if a senior citizen is happy staying put, the heir or the caretaker may not like the idea.
Retail space promises regular rental return and decent appreciation. Driven by huge consumer demand, there is increased construction activity in the retail industry. But for now, you should stay away from retail space, especially malls.
Increased vacancy: Data suggests shop vacancy would increase in the near future owing to oversupply since retail space is concentrated in a few metros.
According to a recent report by property consultants Jones Lang LaSalle, at the end of the third quarter in 2010, NCR-Delhi and Mumbai together constitute 70% of the total retail space in India. The report adds that 94 shopping centres with total retail space of 37 million sq. ft is expected to come up across seven cities between the fourth quarter of 2010 and the year 2012. It forecasts 24.9 million sq. ft of absorption against this supply in the same period. This will increase vacancy from 19.9% recorded in the third quarter in 2010 to 25.4% in 2012.
What this means for the investor? Your tenant may not get enough customers to sustain the rentals, which may eventually plummet.
Revenue sharing model may not work for you: After the 2008 downturn, participants in the retail sector changed their strategy to a revenue sharing model. Through this, the tenant shopkeeper would share the revenues from his business instead of paying a rent.
However, the expected oversupply situation in the metros may get you in trouble. Says Subhranshu Pani, joint managing director (retail), Jones Lang LaSalle: “Revenue sharing may not remain consistent for the occupier as it primarily depends on his business. Buyers and investors in the retail space should be cautious while investing in retail compared with other asset classes.”
If one of these deals appeals to you, make sure you do your due diligence before entering it. Also, it’s best to know what you are getting into.