BackProperly assess real estate projects on city outskirts
With sales low in most cities, retail investors desirous of diversifying their investment portfolio should be able to find good opportunities
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For a retail investor, investing in real estate can be a risky proposition given its large ticket size, illiquidity, high transaction costs, longer cycles and low net rental yields (adjusted for maintenance expenses and taxes). However, many retail investors—who otherwise compare fixed deposit rates across banks before investing—do not hesitate to commit a large chunk of their present and future investible surplus to buying a second house. Many get lured by looking only at absolute profits and listening to anecdotes of wealth multiplication while ignoring the time value of money.
Though risky and difficult to fathom, real estate provides some benefit in terms of diversifying portfolio, hedging against inflation, forcing financial discipline and enabling investors to benefit from the power of compounding.
With sales low in most cities, retail investors desirous of diversifying their investment portfolio should be able to find good opportunities, especially in the periphery of key markets such as Delhi NCR, Mumbai, Bengaluru and Hyderabad, simply because many projects would have been launched or are at pre-launch stage.
Small ticket size: The total cost of units in upcoming locations is relatively lower. The lower cost of land helps in maintaining lower property rates. Moreover, investors can find projects with smaller unit sizes, which further lowers the price tag. In Mumbai, eastern micro markets such as Thane and Navi Mumbai offer such options. Similarly, on the outskirts of Bengaluru there are Yelahanka-Devanahalli area in the north, Mysore Road and Kanakapura Road in the west and Old Madras Road and Sarjapur Road in the east. Miyapur is an upcoming location in Hyderabad, in addition to areas like Hafeezpet and Nizampet. Developers have also launched several projects in areas surrounding Gachibowli, such as Manikonda, Kokapet and Tellapur.
Increased connectivity: Residential development on outskirts of a city is is typically followed by improvement in connectivity and development of infrastructure, which, in turn, provides further boost to demand and property values. For example, Ghatkopar, Vikhroli, Kanjurmarg and Mulund in Mumbai witnessed appreciation because of proximity to Powai and Bandra Kurla Complex (BKC), and enhanced connectivity to BKC and the city centre. Likewise, in Hyderabad, areas like Kokapet, Nallagandla and Tellapur are well connected to the information technology hub through the Outer Ring Road (ORR). Moreover, upcoming commercial projects surrounding Gachibowli are expected to drive up future demand.
In Delhi, construction of the second phase of Gurgaon metro, ongoing road widening projects, improved commercial leasing activity on Sohna road and completion of Dwarka expressway project will provide some boost to projects in respective areas.
Chance to invest in planned townships: Given the paucity of contiguous developable land within cities, larger townships are located at outskirts and may offer better facilities. Large scale projects also offer facilities that reduce dependence on civic authorities. Consequently, the demand from end-user segment ramps up faster, reducing the overall gestation period for investors by offering quicker leasing opportunities or early exits, provided the project is completed in time.
Financial discipline: Investors can diversify geographically if they want exposure to multiple properties. The small ticket size provides such opportunities. Further, setting an investment goal and taking steps towards it brings in financial discipline. For example, funding the investment with a home loan can force an individual to set aside a large portion of monthly salary to meet the investment objective. In the short term, properties located at upcoming areas are difficult to sell. So, the investor has no other option but to be patient for a few years with such investments and then reap the benefit of compounding their returns. After all, the absolute profits and investment multiplication that are talked of happen out of compounding of moderate returns over a long period and not through super normal gains. However, one needs to be extremely careful in assessing the risk-reward equation.
Assessing risks: Demand in newer areas is driven by expected future development of commercial activity and addition of public transportation and civic amenities. Such investments are primarily based on the premise that the entire area would develop over the investment horizon. Delay in development can elongate the holding period or dampen the realisable value.
Any upcoming area of a city would have many projects by multiple developers. Investors must carry out due diligence with regards to the credentials of the developer, location, title, site and floor plans prior to making a decision. An investment without taking cognizance of the developer’s track record can backfire. Radical changes to project plans could depress the resale values. Also, poor financial health of the developer could result in excessive delays in completion. Investors can face added challenges if such investments are funded with high-cost borrowings.
Markets on the outskirts attract a variety of buyers—speculators who want quick exit, investors aiming for stable rental yields plus capital appreciation and end-users. Therefore, property prices are influenced by the behaviour of speculators and investors coupled with demand from end-users and the nature of upcoming supply. This can lead to price volatility or stagnation and different projects in same micro-market can fare differently.
In addition, cycles in real estate tend to be unpredictably long. During such periods, properties at city outskirts may turn out to be highly illiquid or provide dampened returns or even losses.
Rohit Inamdar, senior vice-president and head, corporate ratings, ICRA Ltd
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