The current market is disheartening. The prices have been stagnant in the last couple of years. What is better then — holding on to a property or selling it off?
Facts
- The stagnancy is here to stay, at least for 2 more years.
- Rental yields are 2–4%. They are consistent with the yields across the world, and won’t increase.
- The fixed deposit interest rates are (and will be) around 7-7.5%.
- Mutual Funds can give you a 10–20% interest rate on a 3 year term.
Options
Keeping the property for the next 3 years
You get consistent 2–4% return from the rentals. If the market takes the turn after a couple of years, may be you can get a 5–10% return in the third year from its sale. Not a bad option.
Selling the property
Let’s assume that you only get your principal (I know it sounds bad, but please, keep reading). Capital gains are negative. No taxation. Minimum returns on any financial instrument — 7.5%. Minus TDS, ~6%. Not bad again, right.
So, what now?
More often than not the wiser choice would be the latter. But soon we will launch a tool to help you with it. Till then, read further.
Our take
The World Bank paper shows that the housing markets behave more or less in the same fashion across geographies. The natural order of demand-supply economics suggests that the real estate prices have a direct correlation with the development dynamics. The question then is, as India is the fastest growing economy, why is this not translating in to price growth?
Growth has shifted its home
The answer is simple, the growth is not because of the growth in inner Bangalore. Entire Bangalore had a GDP growth rate of 6.8% in 2015, while India grew at a higher rate of 7.5%. We can safely assume that the inner city would have hardly witnessed a growth of mere 3–4%. It is the Tier II cities and outskirts of Metros that are bringing in the growth figures.
So have real-estate investment opportunities
The city real-estate is mostly driven by residential and commercial demand (thanks to the startups!). But it is highly unlikely that the main city will see a >5% growth in realty prices. When we say ‘main city’, we mean an area where 85% or more of the land has been constructed upon.
Hence, if you have any apartment (bought as an investment opportunity) in the heart of Bangalore, we would suggest to offload it, in any price that you are getting today. Investing it elsewhere (financial instruments or even real estate in outskirts, other cities) will give you much better return.
Luxury residential prices will rise
Our tip: While the real-estate’s main focus is on affordable housing, it is the luxury real estate that will prove to be a great investment, especially in the city pockets.
[Source: For the past 10 years or so, we have more or less following the growth trajectories of China, especially in real-estate. See for your self.]
As a proof, see the trends in Indira Nagar, Richmond Town etc. in the following image [source: NHB].
So, if you have some spare change, invest it in a villa in the heart of the city. Let it rest for 10 years, and then the magic should enthral you.
Conclusion
Sometimes, the best gain is to lose.
- George Herbert- Do not lose sleep over the low price that you are getting for your apartments in the city today. Offload it.
- Normal financial instruments will give you more returns than your apartment in the heart of the city.
- Real-estate investments in houses/villas in the city, or land/apartments in the outskirts, may yield good returns.
Note: If you have thought about selling your property but are having some trouble, read Problems-I-faced-in-selling-a-property-in-Bangalore.
