Guest Column: Realty check for small investor

Investing in real estate is an advantageous proposition, especially for the individual buyer. It not only provides the investor protection against inflation, but also offers the possibility of capital appreciation. Like gold, realty tends to retain its intrinsic value, and unlike the precious metal, it is possible to earn a regular income through property.

Notwithstanding the obvious benefits that such an investment offers, the individual realty buyer in India is severely hampered by lack of transparency in dealings, absence of guidelines in the sector and limitations in the investment process. Though the deterrents and roadblocks in buying and selling of real estate are intended to prevent speculation, it doesn’t take away from the fact that they reduce the scope of investment for the individual investor, especially compared with the institutional investor. The regulations are also intended to help avoid a situation similar to the one faced by the US; fortunately, our banking system has been more conservative.

Deterrents and Limitations:
Though transparency in real estate is increasing in India, it’s mostly for the benefit of large investors. In any case, investors are forced to zero in on opportunities based on local dynamics because realty is a local business in this country. For instance, FSI regulations, approvals, saleable area norms, stamp duties and property taxes vary locally. This requires the investor to analyse the local market thoroughly and he should deal only in the markets he understands well.

The developer’s accountability is another deterrent for the individual investor. The extent to which one can rely on a developer depends on his credibility in the market and on the strength of enforcement agencies in each state. Large developers are becoming more transparent and professional and there is heightened accountability in the organised sector. This is largely the result of greater awareness among buyers and increased participation by global investors. However, players in the unorganised segments of the market are often not subjected to the same accountability.

Therefore, protection of an individual investor’s interests continues to depend on personal research and understanding of the market. Then there are procedural limitations. While an individual can own multiple properties, banks do not generally provide funding for more than two houses.

While entering the market:
Location, legal encumbrances to acquiring property, current and future market drivers in the area, duration of investment, finances and personal investment objectives are the primary factors to be considered while investing in property. One should also ascertain a profitable entry point, which is a challenge. While it is understandable that buyers will wait for prices to fall, there is a definite danger of waiting for too long. As in the stock market, it is impossible to predict the lowest point and the buyer may lose out on the best deals.

Individual investors should be focused on achieving their objective and selective about their purchase. The decision should be based on the availability of a profitable deal in the location of choice. The right entry point is something of an enigma and can be judged only in retrospect. Currently, the prices in large cities, such as Mumbai, may correct in the mid-term and it may be wise to push back the purchase by 8-10 months. Of course, one cannot make a blanket judgement.

The best course is to study the local market as well as the prevalent and expected dynamics. Another relevant factor would be affordability. The buyer should know how much money he can invest. He must decide the allocation based on his income, financial health and risk appetite. After this, he should search for a property with sufficient appreciation potential in a desired location at a suitable price. The watch-and-wait stance is only for experts and institutional investors, who are willing to risk a loss if the timing is incorrect.

REITs and REMFs Small investors will acquire real investment capability only when REITs (real estate investment trusts) and REMFs (real estate mutual funds) are introduced in India. These will offer them a liquid, dividend-paying means of participating in the market. Unfortunately, no one knows when these will become a reality.re