Month: June 2022

When all the factors are suitably aligned, investing in real estate could be an extremely rewarding alternative to playing the stock market. It entails lower risks, yields lucrative returns and provides greater scope of diversification.

Of course, it’s a long-term investment and one must hold on to a property till the market reaches its true potential. However, the Covid-19 pandemic has triggered a rush towards investing in real estate, since there’s a sense all around that things can only get better from here on in.

The real estate vs stocks is a perennial debate and both have its pros and cons. While buying stocks, you actually bite off a very small slice of the corporate entity, and you can profit if the company’s stock rises or through dividends. While investing in real estate, you actually physically acquire the land or property. You can earn a steady stream of rental income from your investment and you can profit when the property’s value appreciates. You can even expand your holdings.

The appeal of investing in real estate is that it’s a tangible asset and also offers the benefit of diversification. Although it doesn’t provide the same liquidity as stocks, the capital can be leveraged and one can avail sizeable tax benefits.

On the flip side, the stock market can be unpredictable and the return on investment can fall short of expectations. The stock market is also vulnerable to a plethora of risks, including market risks, inflationary or economic risks. The values of stocks can also be hugely volatile and subject to market fluctuations, geo-political events or even internal corporate matters.

These are some of the pros and cons of investing in real estate and stocks:

REAL ESTATE ADVANTAGES

# It’s a source of passive income

# Rental income can keep increasing with inflation

# Offers tax benefits. Capital gains taxes can be deferred if another property is purchased after sale

# This investment is a safeguard against inflation

# Gives you the leeway to leverage capital

REAL ESTATE DISADVANTAGES

# It entails more effort than purchasing stocks

# Investing in real estate can be expensive and the money is locked

# Transaction costs are steep

# There’s no guarantee that value will appreciate

STOCKS ADVANTAGES

# Your investment stays highly liquid

# It’s easy to diversify

# Transaction fees are nominal

# Can be added to retirement accounts with tax benefits

STOCKS DISADVANTAGES

# It is much more volatile

# Risks linked to fiscal policy, tax revisions, regulations, RBI interest rates

# Selling can have sizeable tax implications

# Your chosen stocks can keep faring poorly for a long time

# You run the risk of investing on an emotional urge

With the pandemic-induced volatility, the Nifty crashed by almost 20% over the past one year and many investors have lost 50 to 70% of their capital. On the flip side, the real estate market is experiencing signs of a turnaround. Recent studies show that just about 25% of Indians are opting to invest in stocks at this juncture, while over 70% people are still keeping their faith in buying property, in metros as well as smaller cities.

Things to remember

# An investment decision is totally personal, hinging on finances, risk appetite, etc

# Stocks and real estate come with their unique pros and cons

# Real estate isn’t liquid like stocks and requires time and money. But it can provide substantial appreciation

# While stocks can be easily bought and sold, they are vulnerable to market, economic and inflationary risks

So whatever instrument you choose to invest in, do your research well so that you can make an informed decision. It’s important to remember that for investments in real estate, the key is getting the timing right, whether you are buying or selling. It’s wise to invest when prices are low with a potential to rise soon and to sell when the price curve has reached its crest, so that you can enjoy lucrative returns.

Just as in other domains in our lives like paying taxes and buying groceries, the Internet is now playing a major role in our search for that dream home as well. House hunting has gone seriously digital as more and more people opt for online avenues to find their abode of choice, triggering a rising demand for digital portals that help consumers in their search and discovery, a trend that has only gathered momentum during the and post-pandemic.

This trend is attributed to the rising penetration of the Net across different societal strata, growing urbanization and an increasing willingness to adopt new technology, with the proliferation of smart phones and tablets. Also during the pandemic, particularly during the second wave when there was a slump in the real estate market, property tech entities saw the future and invested heavily in emerging tech like using drones for pictures and video walkthroughs of properties, besides using big data to aggregate a whole host of information that would help the home buyer make an informed choice and in double quick time.

The result? Instead of the pre-Covid 7-8 physical visits to the site, nowadays it’s often just 2 or 3 before the customers firm up their decisions. This is simply because they could garner all the relevant information besides get a complete visual sense of the property online before they even set foot on the site physically. The online slant towards house-hunting has also been seen in smaller cities and towns, since all developers and marketing agents are now totally focused on digital showcasing of properties.

With the Internet playing an increasingly critical role in the search for properties, traditional media tools for showcasing real estate products like print ads or newspaper advertorials are fast losing the dominance they always used to enjoy. While outdoor billboards are still in currency, most of the main campaigns have moved online, with increasing use of new platforms like social media content, Google ads, banner ads, search and discovery portals, online PR, email campaigns, etc. Even most of the transactions nowadays are conducted online using digital payment gateways and real-time transaction engines.

What are the obvious benefits of online house-hunting?

# Saves time: With people hard-pressed for time, hopping from one location to another in search of your ideal home can be hugely taxing and even impractical sometimes. Thanks to the property portals and listings, you can explore a large number of properties in a timely fashion.

# Wider umbrella: Sitting on your laptop/PC, the world is your oyster as you can search for properties anywhere in the city or in other cities as well. This gives you a wider umbrella of products to choose from.

# You are in control: Since you are in control of the search yourself, you can narrow down the search effort suited to your preferred parameters.

# Real-time updates: A very important advantage of online property search is that details and listings are updated in real time and you don’t waste your time on some product that’s no more on the table.

# Better credibility: An online presence or profile will always add more credibility to the developer or the selling party. For instance, if a rental property is listed online, it evokes more trust among the home-seeker.

# You get much more: An online search doesn’t only give you the option to buy or sell or rent, but gives you access to a whole host of allied services like vaastu consultants, valuation and renovation services, legal, interiors, architectural and structural inputs, etc.

# It’s more effective: An online presence gives you much more exposure and a larger basket of options, whether you are a buyer, seller or tenant.

# Filtering tools: When checking listings online, you have the option to choose from an array of filtering tools to whittle down the scope of your search in terms of preferred location, price band, floor area, features, etc. You can even create a folder comprising your preferred properties that showed up in the search.

Are you aware of the difference between “super built-up area” and “carpet area”? Or between “fixed-rate loans” and “floating-rate loans”?… It’s possible that you don’t have complete clarity on these terms. However, if you are planning to buy a property, whether for habitation or investment, it’s necessary to learn about some commonly-used jargon for your own benefit and security. This is more so because in the fast-evolving domain of real estate, there has been immense transition and consolidation, with the industry becoming more and more professional every day. So a lot of informal or colloquial phrases have been replaced by formal, globally-benchmarked terminologies. Here are a few critical terms you should know about before doing a real estate transaction:

#Carpet area: This is the net area inside the external walls that you can use or lay a carpet on. This will exclude usable space on the terrace or balcony, but will exclude all common area spaces like elevators, stairways, lobby, etc, while including the external walls.

# Built-up area: This is the entire built-up space extending to the property’s periphery and includes the total thickness of the walls — inner and outer – carpet area and covered areas including balconies and terrace. Built-up area will again not include common areas like lobby, stairways, lifts, etc.

# Super built-up area: The super built-up area will include the entire built-up area of the property that will include corridors, lifts, staircases and other usable areas. For apartment buildings, the common areas are proportionately divided among the apartment owners.

# Rate per square-foot: For any property transaction, the price-determining unit is square foot or cottahs/bighas/acres. In the case of an apartment complex, the price of a flat is fixed on the basis of carpet, built-up or super built-up area.

# Home loan: If you want to buy a property and have a financing need, you can obtain a loan from any bank, housing finance corporations or non-banking financial institutions. Home loans are repaid in equated monthly installments (EMIs) over a period agreed upon. This could range between 5 and 30 years.

# Loan term: This is the tenure of your loan-repayment plan by way of EMIs. The EMIs are higher if the duration is short, but you benefit from considerably lower interest payout. On the flip side, a longer-term loan tenure will ensure lower EMIs, but you end up shelling out a lot of more money because of the increased interest payout.

# Interest rate: This is the rate of interest that banks charge on home loans. The rates offered are slightly lower for women borrowers, compared to those offered to male borrowers. The rates at present are hovering in the range of 6.9 to 8% per annum.

# Fixed-rate interest: If you opt to keep your interest rate fixed for the whole tenure, you are insulated against fluctuations in monetary policy. You should know though that fixed rate of interest is not actually fixed for the entire tenure. So learn more about this from your bank/FI.

# Floating-rate interest: If you choose floating rate, your interest on loan is liable to alteration with every change effected by the RBI in terms of guidance rate, called ‘repo rate’. So you could gain or lose, depending on the banking regulator’s guidance parameters.

# Loan default: If a borrower defaults on his/her EMI payment for 2 consecutive months, the bank will slap a penalty. In case of a willful default, legal action can also be initiated against the borrower and the property can be attached as well.

# Credit history: If you have a good history of repaying your credit card bills, loans and any other debts on schedule, you will have a high credit score of more than 650. This will ensure quick approval of home loans as well as lower rates. A bad history of repayment on the flip side can also result in rejection of home loan.

# Floor area ratio (FAR): FAR is the ratio of the entire built-up area and the actual plot area as sanctioned by the government. The built-up area will increase with the rise in FSI. The seller/developer has to produce the FSI before the sales deed can be finalized.

# Property appraisal: Before sanctioning a home loan, the bank usually sends out an expert team to evaluate the property so that its market value can be ascertained. Once that is established, the bank would offer a maximum of 90% of that market value as loan, notwithstanding the borrower’s personal loan eligibility.

# Freehold property: When the owner has full and unconditional rights over the land and the building that stands on it, the property is termed a “freehold property”.

# Circle rate: The government fixes a circle rate for each locality as a benchmark for transaction in that particular locality.

# Stamp duty: You must pay a portion of your property value to the government to register your property, which is called stamp duty and can vary in the range of 3 to 10%, depending on the state where you are buying your property.

# Registration charge: This is a central government levy and is usually 1% of the property value which you have to pay to complete the process of registration.

# GST: Developers have to pay goods and services tax or GST on the sale of units in under-construction projects to the government, which is then passed on to the buyer.

# Sale deed: A sale or conveyance deed is a document that is created at the time of sale of the property. Once this deed is signed and registered, it means the sale process has been completed and the buyer becomes the rightful owner of the property.

# Mutation: Property mutation is entering the ownership title in the official record books of the local municipal body. Once mutation is done, the name of the earlier owner is replaced by that of the new owner and the property tax bill is generated in the name of the new owner.

# RERA: The Real Estate (Regulation and Development) Act, 2016 or RERA was introduced to protect the interests of home-buyers and ensure greater transparency among real estate developers, in turn boosting investments in the sector.

For those aspiring home-buyers still sitting on the fence, spooked by the RBI raising repo rate by 0.40 per cent to 4.40 per cent recently, making home loans slightly costlier, the message is — the longer you wait to take the plunge, the higher will be your property cost.

Home loan interest rates are now hovering in the range of 6.9 to 7.2%, which is still affordable and most industry experts feel this is the right time to buy because even if the interest rates go up in the coming months, it will still be much lower than the historic pre-Covid highs of around 8.5%.

The past three years of the pandemic have seen a continued reduction of home loan rates, touching a mouth-watering low of 6.4% in the last quarter of FY 2021, exciting home buyers and resulting in brisk property sales over the last two years, a trend which started after the first lockdown when people had ample time to search for properties and online enquiries and sales increased exponentially.

This surge was further boosted by difficulties in finding rented accommodation, the spread of the pandemic and care issues. The developers also contributed to the buoyancy by offering lucrative discounts and innovative ownership schemes. All these factors combined to catalyze a boom in real estate transactions.

While interest rates have now started moving up due to high inflation and excess liquidity in the market, the government has also stepped in to curb inflation by raising rates. However, the raging war in Ukraine and the increasing geopolitical conflict will play a crucial role in determining market dynamics since the Indian economy is largely dependent on oil import bills and we are facing an oil-related inflation. Under the circumstances, the government can play its bit by extending home ownership schemes to sustain the demand, particularly among the LIG/MIG segment.

The RBI’s move to increase repo rates translates into higher home loan cost for buyers, for sure. For instance, if your borrowing is INR 50 lakh, your EMI will increase by around INR 1200 at the existing rate of say 6.7% for a tenure of 20 years. The corresponding hike in EMI would be in the region of INR 1800 for a 75 lakh loan.

So how do I manage my EMIs now?
For existing borrowers, there are two options. One can either increase the tenure of home loan repayment and keep the EMI amount same, or you can part-prepay your loan to whittle down the monthly installment amount. Most borrowers tend to stretch the tenure of loan repayment to keep the EMI constant, which means you will need longer to repay your entire loan. However, the most viable alternative is to prepay the loan to the extent possible and reduce the tenure. This can lead to substantial savings in the final analysis.

Given the innate energy and dynamism in today’s real estate market, Pioneer Property doesn’t believe there will be any significant hike in home loan interest rates by commercial banks this year, perhaps in the region of 0.6 to one per cent. So the property market is still a very safe bet to park your savings, since this uptick in the real estate scene is only expected to gather further momentum, with prices set to jump in all the segments. So the value of your property will keep appreciating.

With rebates in stamp duty and registration fees still on, and a whole basket of options to choose from in every segment, it is unlikely that the marginal rise in the cost of home loans till now will have a massive bearing on the market in the short to medium term.