If you are investing in real estate, put it through the metrics you put other products
I remember that it was a decade ago that I went to an under-construction residential housing society in Kundli, Haryana, adjacent to Delhi. I was with my friend who was looking to buy an apartment there. My friend is a north Delhi-based businessman having businesses in Rithala, Bawana and Kundli industrial areas in and around Delhi. At the project site, we visited sample flats, these were beautifully done up. The lighting, furniture, furnishing and fittings were exquisite and the rooms looked very spacious. The kitchen had modular fittings and all this got my friend very excited. A decade later, having covered real estate all this while, I now know the difference between what the developer shows in a sample flat and what he actually delivers. The asking price of the apartment was around ₹ 22 lakh 10 years ago.
Recently, I visited the same residential housing society in Kundli again for a story. I saw that around 2,500 apartments were already built, but more than half were vacant. I found that one can still buy a two-bedroom completed apartment in less than ₹ 30 lakh, even after 10 years in the same project. That means over the last 10 years, prices increased at just about 3% per annum, less than the interest rate you get on savings bank account. Even if I consider towers in the project that are closer to the highway or at the entrance of the project, the price of a two-bedroom is around ₹ 35 lakh in the resale market, i.e. an increase of less than 5% per annum over 10 years. Also, the average rental of a two-bedroom is ₹ 7,000 a month or about 2.5% of the property value annually.
At the time of the project launch, the developer had talked up the value proposition of the project given that it is strategically located on national highway 1 and enjoys proximity to Delhi. Besides, other infrastructure projects like Kundli-Manesar-Palwal (KMP) expressway, proposed metro connectivity and cyber city will boost and develop the Kundli real estate market. The developer was also confident about Kundli being turned into an education hub with foreign institutions and an IIM branch proposing to come into the area. However, till date, other than the KMP expressway which was under construction even before the project was launched, nothing else has materialised.
What we need to remember is that just a proposal of an industrial corridor or infrastructure projects brings such locations into focus from a real estate angle. Developers come up with housing projects to capitalise on such news. Scheme freebies and offers were made to woo home buyers and investors. But whether booking or investing in such locations is worthwhile depends on various factors. My lesson from this story was that punting on real estate can go very wrong.
This is not the only case; there are various examples where real estate has not given better returns compared to other assets classes. If we look at data, real estate has given a return of about 10.1% and 12.15% annually in Delhi and Mumbai, respectively, between 2001 and 2017, compared to 11.75% and 13% annual returns during the same period from gold and equity, respectively (read more here.
What I also understood is that, typically, when it comes to buy a house, people exhaust all their savings and even then if they fall short of money, they don’t hesitate to take a huge home loan to finance the shortfall. What makes the situation worse is the buyer’s tendency of getting attracted and end up buying something which is beyond their budget. My friend ended up buying a house in Sector 24, Rohini, Delhi, two years later in 2010. He bought a builder’s floor for ₹ 32 lakh consisting two bedrooms, a hall and a kitchen, his initial budget was ₹ 25 lakh. He bought a property out of his budget with the conviction that real estate will only appreciate. I asked my friend about the prevailing price of the house he bought; he said it is about ₹ 50 lakh, again an increase of less than 6%.
But had my friend bought in the commercial area of Kundli, the property would have given a return of five times. But most retail investors shy away from commercial deals and stay with residential real estate.
What I learnt from Kundli is this: if you are investing in real estate, put it through the tough metrics you put any other investment. Do not think that prices will always only rise. Do not believe the builder hype. Avoid buying under-construction flats. And always look at the cost benefit of a real estate investment. Do not buy on sentiment because the tiles in the sample flat are super nice.