Author – Dev BT
What is Risk in Real Estate?
“Risk comes from not knowing what you’re doing”
- Warren Buffet
Knowledge is power in real estate Investment and you have to collect it constantly about your market. Once you find a property you like you must know how to properly analyze to determine cash flow, debt service and continuing to improve VALUE of the property over time. Also, you have to know how to refinance and when and how to exit the market with Profit and determine when and where to purchase next Investment Asset”.
Our Advice – If you are a short term Investor, DON’T BUY REAL ESTATE. Real Estate Investment is meant for people with minimum 10 years of Holding Period (Except Institutional Investors who buys in Wholesale and Sells in Retail, will discuss this in some other posts).
“In Reality Property Price GROWTH depends majorly on SUPPLY & DEMAND Factor i.e.
- Less Supply More Demand – Higher Growth
- More Supply Less Demand – Lower Growth”.
Real estate prices are deeply cyclical and much of it is dependent on factors you can’t control, however you can reduce the RISK and Improve on APPRECIATION factors by Smart Investment Strategy. Whether you plan on buying a new property, old property or want to use the equity in your home for other expenses, it is important to analyze both broader market conditions and your specific property location, potential to determine how the home’s value may fare over the course of time.
One Question that every prospective property owner has wondered at some point or the other is “What are the KEY factors that determine property prices?” Individuals looking to buy a property would benefit greatly from this information so that they can identify localities or projects that require less Investment and Promise HIGH RETURNS in the years to come.
So how exactly are real estate prices determined? We’ve uncovered 24 of the most important factors affecting the Property market and that will almost certainly impact the price of your Property Investments in coming years including one that is regularly overlooked by most.
Micro-Factors Affecting Real Estate Prices
We’ve all heard the phrase “Location and Neighborhood” but what does this mean in practical terms when it comes to property prices? For most home buyers, this translates to some key factors that impact your everyday life, your lifestyle and future property Value;
- Schools and Education Centres – Quality of local schools, Crèche, Colleges and other education hub is the single most important factor for buyers with children of school – college going age.
- Employment Opportunity – Proximity to local employment opportunities is a very high priority for most employment-age buyers.
- Entertainment, Social & Shopping – Proximity to social, shopping and recreational centers is valued most by younger buyers but plays an important role in pricing for all homebuyers.
- Major healthcare Centre – Properties near the Major Quality Multi-Speciality healthcare centres offers good rental yields and offer better appreciation potential in short-period.
These Four Preferences – Proximity to school/education centres, Work, Entertainment/Shopping and Healthcare — are a foursome factors that make for an ideal Neighborhood with high future appreciation potential of the property. If you’re getting three out of four, you should be buying at @Reasonable (Mid-to-higher) price, however, if you are getting all 4 benefits the prices will be on the HIGHER side and the potential for further GROWTH will be higher. Other key factors;
WE have heard Millions of buyers saying this, if you don't want to regret after 5 years and repeat same words, just go and BUY!!! Regardless of what so called Experts & Analyst suggest and predict.
When it Comes to Real Estate Investment...
THERE'S NO CORRECT-BUYING-TIME!!
If you did not ACT today, the same asset will be available after 5 years @2-4X price.
1. Short Supply High Demand
This is the TOP FACTOR for Real Estate PRICE GROWTH across markets regardless of where and which country the property is located.
When the demand for real estate is HIGH, prices skyrocket. When the number of inventory increase and demand is LOW, property prices usually drop.
Let’s dive into Practical examples;
- When IT/ITeS boom took off in early 2000, there were HUGE shortage of Large A-Grade realty assets across markets in India particularly in Delhi/NCR, Industrial Areas like Okhla Industrial Area-3, in South Delhi were converted into A-grade Commercial Office towers and were fetching Rental @Rs.150-250 per sq.ft., and in the Commercial District like Connaught place and Nehru place, the asking price was @Rs.350-450 per sq.ft. + CAM charges for Office Space – A SITUATION OF SHORT SUPPLY. This situation was prevalent not just in Delhi/NCR, it was across Metropolitan markets in India.
During 2004-5, large developers like DLF, Unitech and others have realized that there’s a huge demand for large Commercial Office spaces and came-up with HUGE IT SEZ (Cyber Hub by DLF Ltd., Cyber Park by Unitech Group) in Gurugram where A-Grade Commercial Office spaces where Office Spaces were offered @Rs.50-70 per sq.ft., so most Corporate’s with larger space requirement rushed towards Gurugram, Haryana – A SITUATION OF OVER-SUPPLY.
- Another example why Most Popular or Famous HIGH-STREET MARKETS across the globe fetches Sky-Rocketing Rentals? Simple Reason;
LESS SUPPLY & HIGH DEMAND
For Example there’s 7500+ Organized Retail brands across different categories who wish to have their presence in Connaught Place, New Delhi, but there’s only 165-185 ideal Leasable Shops for Retail Purpose, so if one shop is VACANT, there’s 500+ Brands who is interested for the same shop, however, most will back-down due to Affordability factor others will compete to grab that location even @Higher Price, forget about what the prevailing market Trend or Price is!!
We have seen Showroom space in Connaught Place which so called expert Estimated Rental worth Rs.10-11 lakh per month for 1900 sq.ft. in 2006, the same Space were taken for Rs.16.50 lakh per month rental and there’s lot of such examples across markets.
However, the Question arises, are these Retail Brands really generating that much REVENUE from these Retail Stores and are they earning any Profit? We will write post on this subject in coming months, Why Retailers are Signing High Rental Leases?
Similarly in Residential Housing market, those areas with good Neighbourhood across market is still very much in demand and least affected by Market fluctuations, it might be down 10-20% but demand in these Zones are always HIGH.
AS AN INVESTOR IF YOU FORESEE THE RESIDENTIAL ZONE HAS GOOD APPRECIATION POTENTIAL, DON’T THINK TWICE, JUST JUMP-IN, BUY AND HOLD..FORGET ABOUT WHAT SO CALLED ANALYSTS AND EXPERTS BRAGS ABOUT (Most experts and analysts reports are INTENT driven, like SEO for web-traffic, these analysts key job is to drive-traffic towards those direction and they are getting-paid for it).
LIKE WE HAVE MENTIONED IN OUR EARLIER POST, LISTEN TO EXPERTS BUT DO WHAT YOUR GUT-FEELING SAYS, HOWEVER DO EXTENSIVE RESEARCH!!!
Best thing about Property Market….The demand grows with passing time and the Zone which is empty today, in 10 years, the place will be filled with Dense Population.
AND POPULATION GROWTH IS ONE OF THE BIGGEST DRIVER OF REAL ESTATE PRICE GROWTH.
2. Maintenance, Upkeep and Security
Most home buyers prefer a house that is Ready-to-move-in and they are willing to pay a reasonable premium for that comfort, upgraded kitchens, bathrooms, designer curtains and new floorings are among the most important upgrades looked-up by homebuyers because they represent a major expense (and headache) if the buyer has to upgrade them.
Apart from these factors the maintenance of Common areas by Professional agencies and Security are an added attraction factor and most living in such zones don’t mind to pay minimal fee-per-month for those services and no-one likes to Live in a High-end or Posh Apartment which is shabbily maintained and not secured properly for Peaceful living.
These Factors apply whether it’s an Apartment or a Gated Residential Community.
3. Good Neighborhood
“A good NEIGHBORHOOD Increases the Value of your Property“.
– A Smart Real Estate Investor
Every family wish to live next to a Good neighborhood and it matters a lot when it comes to choosing a property for a LIVING or INVESTING. Better the neighborhood Higher the property Value Growth Potential in coming years.
4. Economic Conditions
The strength of the overall economy significantly impacts the real estate market as consumers’ ability to support Real Estate prices largely depends on key factors like GDP growth, unemployment, and income growth. Other local macro-trends can outsize national factors in their importance; this gives buyers the ability to spend more on Real Estate, consequently INCREASING PRICES.
5. Interest Rates
The smaller the monthly payment, the more “affordable” a loan is to prospective homebuyers; this fact can increase the size of the mortgage for which homebuyers are eligible to get which, in turn, might drive up property prices. However, because income and other economic factors continue to strengthen, most experts don’t believe this theory neither we support that a rise in Interest rates will have a significant impact on property prices since it keeps fluctuating every now and then.
We have seen during all these years, only small home buyers are concerned about the Interest Rates. In contrast HNI’s, Large Institutional Investors and Venture Capital funds are least bothered about this factor while Investing in Property, Why? They knows very well that, if they keep waiting for the LOWER Interest rates, they can miss the bus and the same property will be available @higher price next time or when the Interest rates are low.
6. Investors Interest
The Country’s legal system should be open to Global Investors regardless of any Country, arrival of more Investors means more confidence among the Investor Community.
The high UNSOLD Inventory level creates an appealing environment for investors with an appetite for Property @Lower Rates across markets. The increased volume of NPA’s/loan defaults and short sales provided both smart domestic and foreign investors with the opportunity to snatch up inexpensive properties to resell at a profit @later date when the market rises thus resulting in Good ROI. The theory of “Buying @Low and Selling @High” is very much practical in Real Estate Buying.
7. Zoning Regulations
It is proved that certain Regulatory factors such as Zoning Regulations can also have BIG impact on real estate prices. If zoning regulations restrict the amount of construction in an area, the overall allure of properties there increase because of open spaces, landscapes, greenery, organized & planned construction and so on. The live example in India is Lutyan’s Zone, Delhi and Chandigarh, which is the BEST and well planned Residential Zones and highly Restricted Zones.
Apart from the above, Zoning Regulations creates the situation of Demand & Supply gap thus creating Short-Supply of desired assets and if the area falls under popular zones, the price GROWTH will be at the fastest pace @Shortest period.
8. Capital Growth Rate – Household Income
With a rise in household income, property prices are only expected to rise since the demand for housing will grow with increased buying power.
9. Capital Gains Tax can affect Property Prices
Capital Gains Tax (CGT) increases government revenue but this comes at a major economic cost. CGT, even the discounted one, brings down the return on Investment and thus affects Investors and Entrepreneurs monetarily and psychologically. This can translate into reduced reallocation of capital and can hamper available stock creating situation of Under-supply).
Note that CGT is applicable only on realization of Profit when you sell the property. There is no CGT if a buyer decide to retain their assets or sell @Loss or at actual buying price.
Research suggests that there is a definite relation between the way Capital gains tax is treated in a Country and the Venture Capital flowing into it. The result shows Decreasing CGT, after all, can lead to a RISE IN INVESTMENT and Increasing CGT can lead to FALL IN INVESTMENT by most large Investors, HNI’s and Venture Capital Funds.
10. Interest by Overseas Buyers
Big Interest by Overseas buyers in the Realty Sector will always create a situation of short supply situation, since in most cases, overseas Investors comes in Groups and as a result, the Prices are bound to shot Upward. However, in such situation, the prices don’t increase across markets but to certain areas only where these NRI buyers shows keen interest.
11. Urbanization - One of the key Factor
More than half of the world’s population resides in cities. 66% of the population, or 2.5 billion people, will reside in urban areas by 2050 (Forbes report 2015). Urbanization is in a period of rapid development nowadays across the globe.
The resurgence of cities as an economic center at the beginning of the century has made them a beacon for highly skilled jobs with better pay and benefits than those found in the suburbs. These thriving city centers also offer urbanites the ability to live, work, shop and entertain in close proximity, satisfying their desire for shorter commutes @Walking-distance. Research has proved that 62% of Millennial’s prefer to live in Mixed-Use-Communities found in Urban Centers.
The real estate Industry plays an important and supporting role in the development of urbanization and, at the same time, the fast-developing urbanization has created a platform for the development and GROWTH of the real estate Industry.
Theoretically, the urbanization process results in Mass population growth and boost the demand for various properties and nurture more investment in Realty sector, as a result creates the situation of MORE DEMAND and LESS SUPPLY thus INCREASING Realty prices.
12. Better Infrastructure and Amenities
The Social and physical Infrastructural development is one of the most important factors which influence real estate prices across markets. The presence of roads, community centres, children parks, jogging tracks, parking facilities, airports, flyovers, malls, local retail markets, commercial offices, schools, colleges, hospitals, metro connectivity, bus terminals and other facilities in the vicinity of the property, helps in property value GROWTH. Growth Potential of property is clearly based on the availability of NECESSITIES and FACILITIES connected with comfortable housing.
- Market drivers can be defined as developments in an area that increases the value of living there. The better the infrastructure, greater will be the GROWTH.
- Any changes and addition of infrastructure in and around the property add an established livability quotient for the consumers thus increasing on demand of that zonal area.
Projects and Properties that interlink localities to the famous or well-known neighborhood areas also influence the price of the property in a BIG WAY.
13. Property Title – Freehold or Leasehold
Properties which are constructed on FREEHOLD Land tend to command a higher valuation than those on LEASEHOLD plots. On leasehold properties the buyer needs to pay Annual Lease charges and additional charges to Govt. departments if he/she wants to convert it to Freehold title in the future and these charges keep increasing with passing time. Another Negative part of Leasehold property is in the Leased Title deeds which have few Unfavorable terms not suitable to Institutional Investors. Most Leasehold properties carries tenure of 33 to 99 years of Leasehold period and renewal for further terms after that is uncertain. Most astute Investors avoid to buy Leasehold property due to this factor.
Another key factor is..Once the 90% of Leasehold period is over, Price of the property Plummets to it’s lowest.
Freehold titled properties command higher price and more keen interests by the Investors community since they can own the Asset indefinitely.
Our Suggestion – Buy Freehold property always, so that your next generation can enjoy it’s FREE TITLE RIGHTS.
14. Commercial Development in the vicinity
The development of Retail Malls, IT offices, Quality healthcare, and Special Economic Zones near residential areas help in cutting down the time and energy wasted in commuting to workplaces and increase the demand of such properties thus increasing the GROWTH potential of that location.
Let’s take the example of Gurugram, Haryana, the development of 1st Organized Retail Mall “The Metropolitan Mall” and 1st IT SEZ “Cyber Hub” had resulted the price escalation by 3x of the area in DLF-2 in 2006-7 and still the properties in this location is very much in demand and same story is repeated in Multiple locations across Cities and Markets.
15. Consumer Geography
Consumer profile surrounding the property location is one of the key reason which can affect either APPRECIATION or DEPRECIATION of Real Estate Assets.
High earning consumers have high affordability and lower earning consumers have lower affordability in terms of purchasing Property.
For higher & faster growth potential, look for High earning Consumer Profile. However, Mid-market or Middle-Class profiles in densely populated zones offers high & fast appreciation due to higher demand.
For Example; Investors who bought 3BHK apartment, size admeasuring 1350 sq.ft. in 2004 in Malvia nagar or Paryavaran Complex in Saket, South Delhi @Rs.12,50,000/- to 15,00,000/-, the same apartments in 2016 is worth Rs.95 lakh to 1.20 cr. – an appreciation of 6-7X in 12 years.
MIDDLE CLASS POPULATION’S ARE THE BIGGEST CONSUMERS OF RESIDENTIAL ASSETS ACROSS THE WORLD, THUS TARGETING THIS SEGMENT IS ONE OF THE WISEST & SMARTEST INVESTMENT DECISION. (These are real-life examples & not a blind research reports).
16. Structure and Location Presence
The following category offers better GROWTH potential compared to other in the same localities i.e.
- Park or Garden facing
- River Front facing. (However, it should not be Stinking-River).
- Golf course facing.
- Corner Property location.
- Facing or Near the Local Community Centre/Market.
- Facing Commercial Hub/Shopping Mall
- Sports Complex facing.
- Wider Road – 80+ ft. (wider the better).
The Building structure with modern WOW design also matters when it comes to Property price evaluation and Growth potential. There’s a saying in Hindi “Jo Dikhta Hai Wahi Bikta Hai”, and it’s very much applicable in Real Estate and applied very effectively by Successful and Smart developers across the Globe.
Key Factors to keep in mind;
- PLC – (Preferential Location Charge) These locations will cost 25-40% HIGHER than other locations.
- In-fact, most of these locations are already either bought by Developers close circle Investors or Developer will hold-it for last stage sale, gaining much Higher Premium within short period.
- High Demand, Always – These locations are always in-demand and Price appreciation potential’s are the HIGHEST.
- High Sale Price – When a Buyer goes for sale of these locations, they will fetch 25-35% much higher price compared to other locations within that Residential Zone.
17. Growth in Population
Growth in Population means growth in Housing needs and Spending Power of Consumers!!! If you research closely there will be BIG difference in property prices in last 10 years period in the same locality. The population growth increases the demand for residential and commercial properties and these two factors are interrelated which translates directly into GROWTH of real estate prices. So one factor a Real Estate buyer should always look for is, estimated population growth of that zone and the reason for this growth factor.
We have seen property prices multiply by 4-5 times in 10 years period in few densely populated localities of Delhi/NCR due to high population growth thus increasing the demand for Residential apartments.
One of the key Example is DLF & Sushant lok in Gurugram, Haryana, the plot size admeasuring 215 sq.yd. costing INR 12,500-14,000 per sq.yd. in 2003-4, the same plots prevailing rates is in the range of INR 1,20,000-1,35,000 per sq.yd. in 2017. (these are not a survey report, these are the on-ground reality, few of our close and Astute friends have Invested in these locations).
Notes – In 99% of cases, Population Growth Results in REAL ESTATE PRICE GROWTH due to HIGH DEMAND and LOW SUPPLY factor.
18. Commercial Viability
Ask yourself – Can this Property be used for Commercial Purpose?
If the property is located on 80+ feet wide road and facing the main road or highway, it has very high Commercial Viability and potential of GROWTH is very high in such location. However, before jumping to conclusion, check the local prevailing laws, whether commercial activities are allowed in such localities or not? In most cases in India it will be allowed after paying certain Commercial tax to Govt. authorities but still few locations Strictly doesn’t allow Commercial Activities in Residential Zones i.e. Lutyans Zone and Malcha Marg, Delhi and Chandigarh.
The properties with Commercial Viability with large floor area located on the main road has high demand from many large Retailers like Automobile, Big Retail Formats, Banks, Furniture retailers, food & beverage sectors and Hospitality sectors. Few examples are;
- Delhi – South Ext.-1 & 2, Lajpat Nagar, Defense colony, New Friends colony, Rajauri Garden, East of Kailash, Nehru Enclave, GK-1 Enclave, East Delhi (Preet Vihar), Pitam Pura, Janakpuri, Hauz Khas, Green Park, Panchsheel Park, etc.
- Gurugram – Golf course road – M.G.Road.
- Hydrabad – Banjara Hill, Jubilee Hill.
- Bangalore – Indira Nagar.
- Bhubaneshwar – Janpath road.
- Jaipur – Tonk road.
- Dehradun – Rajpur road.
- And many other Cities.
Our Advice – For best Real Estate GROWTH VALUE, look for assets which has got Commercial Viability.. 90% of Smart Investors look for this kind of Assets…Always!!
19. Properties near the Popular Heritage Centres, Famous/Landmark Assets or Celebrity home
There’s a saying that if your neighbor is a Celebrity, you will also will be looked and treated as a Celebrity regardless of who you are, so if your property is located next to Celebrity or landmark address, Value of your property automatically goes up and there will be lot of takers because it’s Human Nature everybody wants to live next to Celebrity or famous personality regardless of whether it adds value to their life or not.
Famous and Popular Landmarks have it’s own charm and majority of people love to live next to such neighbourhood.
20. Corporate Offices and Sustained Job Growth
Locations where plenty of Corporate Offices from diverse Industries have presence, these locations will attract and have high GROWTH in Realty Prices due to sustained job growth.
Office Space demand is often considered an indicator of the job market. The higher the office space absorption the stronger Residential and Commercial property Demand and Price Growth will be in those localities.
21. Depressive Market Conditions
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
– Warren Buffet
This is the situation when others are FEARFUL to Invest in Realty Market.
RECESSION & DEPRESSIVE MARKET MEANS “GOLDEN OPPORTUNITY” FOR INVESTMENT; Most Smart Investors, Large Institutional Investment funds, HNI’s and Astute Investors wait for markets to turn DEPRESSIVE & RECESSIVE, and this is the time they will enter and grab the Assets @Lowest Price, this is called – VULTURE CAPITALIST STRATEGY!! Very smart one with very high Growth Potential! If you have Liquid Funds, JUST JUMP-IN and INVEST AS MUCH AS YOU CAN @THIS CONDITIONS!!
We have observed this trend during all these years, Prime assets being taken-over at Less than Half of price due to one reason or another @Depressive market situation.
Due to Depressive and Slow market condition and implementation of robust Realty law in the form of RERA, most Large Global funds are scouting for Premium Assets across markets in different category in India currently and we will be discussing BIG Venture Funds Activities in India in our next Post.
22. Land Use Policy Change by State or Central Govt.
This opportunity offers POT OF GOLD.
This is one factor over which you don’t have much control, however, if you have prior Informations about it, as an Investor, can gather Big chunk of land from local owners, hold it for few years or till Land-use policy is implemented, Cash-out and rush to Bank. Most land title in India falls under Agriculture Zone, occasionally Govt. announces LAND USE changes of certain Zonal areas to Residential, Institutional or Industrial when the demand arises due to many factors, in those situation the price of land Multiplies immediately and automatically.
Before announcing setting-up of Zewar Airport, Greater Noida, Investors who had prior informations about the changes had gathered HUGE chunk of land from farmers @Very Nominal price, once Govt. announced publicly, the land prices escalated and most Investors had cashed-out by selling their asset and gaining HUGE profit in shortest time.
Same story’s are repeated in Various markets for various reasons and Smart Investors had Made BIG Bucks.
The Risk Factor – However, there’s a RISK factor attached to it, if the informations turned-out to be wrong OR Govt. change or cancelled it’s Zoning plans, you will be stuck with your Investment for long time. Be Prepared for such scenario’s before Investing in such situations.
23. Strong Real Estate Investors Protection Law in Place
Many countries have very restrictive foreign investment laws or banking regulations that make it difficult to Invest in Property.
However, instead of having RESTRICTIVE Investment law, if the Govt. implement Favorable and Secured legal system in place, Investors and buyers Interest in the Realty Sector will increase.
A strong and effective consumer protection legislation in place like RERA (which is implemented in 2016 in India), will gain Investors confidence thus resulting in more Real Estate buying activities which can result in Realty Price GROWTH across markets.
24. CITY CENTRE PROPERTY – Current or Future Potential
BEST & SAFEST INVESTMENT STRATEGY
Investing in existing City Centre properties will cost higher (per sq.ft.), however, the demand for Rental purpose will always be stable and keep on growing along with passing time but the sales price growth will be slower.
In Contrast Investing in Potential future City Centre location can turn-out to be a Gold Mine for Smart Investors, the live example;
- Investors who have bought Properties in early 2000 in M.G.road, Gurgaon or Golf Course road, had reaped the return @6x–7 Multiple in 10-12 years period.
- Investors who have Invested in Properties in BKC, Navi Mumbai in 2009, had reaped the return @3x-4 Multiple in 7-8 years period, same stories repeated in Whitefield, Bangalore, Pune, Hydrabad and Chennai.
There are Multiple factors at play in Property Value GROWTH
There are several forces at play here, and it is not easy to plan for all of them. In-fact, some of them are beyond our control, for example, it is for Government to implement new policies of land-use, reform capital gains tax discount, etc. However, there are other factors over which we have enough control.
Being aware of these factors can help you determine whether prices being quoted for properties are fair. It can also help you predict with reasonable certainty as to which areas and zones are likely to see good growth rates in coming years.
In our next post, we will discuss more on Various Sector, for more updates on latest posts and news, subscribe to our newsletter, if you have any opinions or better solution, lets discuss on our comment box or mail us, till than Happy Reading!!