Many non-resident Keralites don’t realise that buying a house too early in life may not be a wise idea
Keralites prefer independently constructed houses, thanks to lower land prices in smaller towns of the state
Drive down the coastal belt of Kerala, and you will find the landscape dotted by huge independent houses, built in traditional style. A typical metropolitan resident may, perhaps, envy the people who live in these houses. But take a closer look, and you will find that many of these today are lying vacant.
Mass migration from the state, ever since the Gulf boom in the 1970s, explains the phenomenon of vacant houses to a large extent. As people moved out in search of better job opportunities to the Gulf, and other parts of India, they wanted to leave behind a piece of their lives in the hope of reclaiming it at the time of retirement. A house built on a piece of land seemed perfect to most of them to keep themselves rooted to their hometowns. But with jobs far off and families living with them, these houses remain vacant.
According to the 2011 Census data, about 11% (1.19 million) houses in Kerala lie vacant. While 10% of the houses lie vacant in rural areas, 11.3% are vacant in urban areas of the state. This is much higher than the national average of 7.45%.
Most often than not, buying a house is an emotional decision for most Indian families, including those from Kerala. But remove the emotions for a moment, and you will realize that buying a house early in one’s career, especially if you don’t intend to live in it regularly, is a poor investment decision. What may work better is investing in other avenues and buying a dream house closer to retirement. In Kerala, however, few seem to realize this, blinded by the yearning for home and flush with money earned abroad. The flow of NRI deposits in Kerala has only increased over the years. Within India, Kerala is the top destination for remittances. The southern state accounts for over 19% of inward remittances (a huge ₹1.69 trillion, as of March 2019), the highest in India.
We explore the trend of vacant houses in Kerala, and why it is a bad financial decision for the owners.
That dream house...
Nithin Krishnan, 27, who works as an IT professional in Bengaluru, was raised in Karur, Tamil Nadu, where his parents are settled, but belongs to Kannur in Kerala. Six years ago, on the back of growing realty demand due to the upcoming Kannur international airport, Krishnan’s family decided to build an independent house in the picturesque Kerala town.
Unlike big cities, building big houses isn’t really an HNI affair in Kerala. Barring those living in major cities, Keralites prefer independently constructed houses, thanks to lower land prices in smaller towns. “If you don’t live in major cities in Kerala, you’ll end up preferring independent houses for sure. So there is no concept of flats as such outside Kochi, Trivandrum and Calicut," said Somy Thomas, managing director, valuation and advisory and co-head, capital markets, Cushman & Wakefield India, a real estate broking company.
Most West Asian countries, where over 85% of Kerala emigrants work, don’t easily offer citizenship to the emigrant population. To secure their retirement, people build or buy houses or flats back in Kerala.
But building a dream house, when you still have a considerable number of years left till retirement, has its pitfalls. If you are still working and living with your family abroad or in some other Indian city, chances are the dream house you built will remain vacant until you retire.
The house, which cost the Krishnan family nearly ₹1 crore, has been lying vacant ever since its completion. “We built a 5-BHK two-storeyed house as the demand was good around that time. The house has remained vacant since then. We use it as a holiday home and stay there for one or two weeks whenever we visit our hometown," said Krishnan, part of the tribe of non-resident Keralites or NRKs are they are known.
The significantly higher percentage of vacant houses in Kerala can be attributed to multiple reasons. “The number (of 11%, according to 2011 Census data) does make sense. Many NRKs (abroad) or NRKs (India) build a nice house back home while they are still working outside Kerala. Their aging parents often stay in these houses. But obviously if they are not there, the house could be vacant for quite some time. A majority of the demand today is not coming from NRKs (abroad) but from NRKs (India) who also want to have a house in Kerala. So they end up buying flats in urban vicinities (like Kochi) or end up building a house in their hometowns," said Thomas.
Moreover, the next generation isn’t keen on settling in Kerala due to a lack of job opportunities. “The younger generation, too, is seeking jobs in major Indian cities. A huge younger Kerala population today works in the IT sector and lives in Indian cities like Bengaluru, Chennai, Hyderabad, Mumbai and Delhi," said Thomas.
Also, some couples inherit houses from both families, but still prefer to construct their own house because the ancestral properties are in a dilapidated condition. As a result, at least one of the properties remains vacant.
In this scenario, the question that comes to mind is, if the houses are lying vacant, why aren’t the owners renting it out? Most people are not buying or building houses for rental yield and are okay with it if the house remains vacant, said Thomas.
“Most of these houses remain vacant and are not rented out because the owners feel the tenant will not maintain it properly. Since it is purchased more like a status symbol, they don’t expect to earn rent from it," said Melvin Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners.
It wasn’t very different for Krishnan’s family either. “None of my family members or close relatives wanted us to rent this house; so we never really went for it. It was a dream home that we constructed after so many years; so we didn’t really want to give it on rent," said Krishnan.
Also, the rental market in Kerala is not big. “Most people who seek a house for rent are those who come to the area for jobs. Most of these people are not highly paid and cannot afford to spend a lot on rentals," said Sunoj George, director, Zeztate Property Management Services Pvt. Ltd, a property management service based in Kochi.
Since some of these houses are palatial, few want to take them on rent. “Those who come from other towns or cities in Kerala and have a good salary prefer to buy their own flats or houses and pay EMIs instead of rent," said George.
“The rental market only exists in Kochi and a bit in Calicut and Trivandrum. Except for big cities, there is no demand for rentals," said Thomas.
While there is demand in cities like Kochi, managing the property from another city or country is often a daunting task.
“The biggest problem with real estate as an investment is its highly illiquid nature. Second comes the legal hassles which can demand regular visits back to India just to tackle them. There are lots of hurdles one needs to go through to keep being invested in real estate and it requires additional money and time even after the first time investment in face of maintenance and property taxes," said Piyush Khatri, founder, Sahastha Financial Consultants.
Jithin Thomas, 32, who works in the oil and gas sector in Khobar in Saudi Arabia, had a flat in Kochi in his wife’s name, which her family bought eight years back. As the family would visit Kerala every year, they decided to not rent out the property for nearly five years. When Thomas’s in-laws moved to Australia, the couple decided to rent the flat for some additional income. “We rented out our apartment as it was in demand and we could generate a parallel income while we are away," said Jithin. He hired an agent to manage the flat but his relatives helped monitor the processes.
Also, the rental yield is very low in the state, even in the bigger cities. So you need to assess if the hassles are worth the income being generated. “You get 2-2.5% rental yield, especially in Kochi. Capital appreciation is also not happening for quite some time and it is quite stagnant," said Thomas.
Is the investment worthwhile?
When it comes to real estate, many people end up making poor financial decisions. Apart from the traditional fixation with real assets, the decision of planning to divest or giving the dream house on rent becomes more emotional rather than practical.
Before deciding to build a house in your hometown, assess the ground reality thoroughly and make the decision only if it makes sense financially. Real estate as an investment is not a good idea as price appreciation and rental yields are quite low, not just in Kerala but also in other cities across India. “Purely for investment purposes, I would not recommend Kerala. But if you want to buy for end use, it might be a good time to buy as prices won’t come down further," said Thomas.
Even if you are buying a house to settle there after retirement, evaluate by when will you be able to move into the house. “If you are planning to return to Kerala after a long time, don’t construct the house now. Plan for it closer to your return. If you purchase or construct it now and you return after, say, 15 years, the 15-year-old house may not be suitable for you at that time," said Joseph. You may need to renovate or redo a 15-year-old house at the time of moving in and refit it according to your needs.
When you are closer to retirement, there is more clarity on where you want to settle ultimately and where your children are going to be. “If your children settle down in some other city or country, you may prefer to stay with them. In such a case, your children will not be interested in getting a property in Kerala as inheritance. Purchase a property after considering all such factors. Otherwise, the property can be a liability not only for you but also your children in the future," added Joseph.
You should also evaluate how much total real estate exists in your portfolio. If you already have enough, there is no need to go for more. “A majority of people today are coming with more than 50% in real estate. I will not recommend any real estate to young professionals and not more than 20-25% to Gen X, that too, if necessary. With such low rental yields, it doesn’t make sense to own more than one house, that too (all of them) for self-use," said Khatri.
Don’t forget to take into account any future inheritances you might receive, either from your family or your spouse’s family. “If you are sure of getting ancestral property, it is better not to invest more in real estate. Try to create liquid assets during your active work life. Once you are sure where you are going to settle down, purchase and construct the property of your choice," said Joseph.
If you have already inherited one or more properties, consider selling it off before buying a new one or consider building a house on the inherited land itself.
Most Keralites have a financial portfolio that has a heavy real estate and gold tilt, both of which have given negligible returns over the years. Returns from real estate are pretty stagnant, not only in Kerala but across major Indian cities. So buy real estate only if it is for self-use in the immediate future and invest the rest in financial products like mutual funds that give superior returns in the long term.