Home buyers are today facing a double whammy. On the one hand, the house prices
have gone through the roof and on the other, interest rates have risen to unbearable
levels. And since up to 90 percent of home loan takers have borrowed on floating
rate, they are feeling the pinch as floating rates have touched a high of 12 percent.
On top of that, there are fears that those of floating rates may go further up.
So in these circumstances, the big dilemma before home loan takers is to stay
floating or go fixed.
Home loan expert Harsh Roongta does not advocate shifting from floating to fixed
rate for the existing customers. "This is not advisable as very few banks provide
real fixed rate. Moreover, you need to pay shifting fee and fixed rate loans being
not available for less than 13%, you need to pay higher EMIs. And since interest
rates will not remain high for ever, unless you are totally risk-averse, you should
stick to the floating rate loan". For new loan takers, experts suggest hybrid
rates (part floating and part fixed) to ensure immunity from steep hikes in the
future. Since fixed rates are very high, those choosing long tenures should go
for floating or hybrid rates as rises and falls can be evened out over long periods.
But those interested in short tenures and have the capacity to pay high EMIs should
opt for fixed rate of interest. For existing home loan takers, Roongta suggests
shifting to a new lender offering a lower floating rate loan despite pre-payment
changes that one has to pay.
BUILDER'S TRACK RECORD
At a time when property prices are unrealistically high and there are many new
developers in the market engaged in malpractices, the background check of developers
for investment purposes assumes greater significance in the present context.
The track record of the developer refers to the maturity of the developer in terms
of delivery of projects in the past. This is basically a combination of various
factors including completed projects and compliance to statutes, promised delivery
schedule and actual delivery time, transfer of titles, transparency in providing
rates and charges to the customer overall customer service and litigation history
of the developer. The market reputation and management capability of promoters
should be taken into consideration while making a buying decision. For a buyer,
it is also important to look at the financial strength of the developer, since
it is crucial for completing the project within the contractual schedule.
Farooq Mohammad of Silverline Realty advises that in order to play safe one should
not hesitate to spend even a little extra if the builder has a good standing and
reputation of timely delivery. Chopra emphasizes that in the current scenario
when there is a slowdown it will be advisable to go for those developers who have
a good track record of completing their projects even during recession or slow
Following slowdown and market correction, there are investment opportunities in
realty stocks. Some stocks at present values are good buys, especially in promising
sectors like construction and infrastructure, where there is frantic activity.
From the long-term investment point of view, infrastructure stocks have good prospects,
particularly as investment in infrastructure that currently stand at 3.5 percent
of the GDP is expected to touch 7 percent by the year 2010. The recent measures
by SERI to rein in developers by tightening realty IPO norms will also benefit
investors. Earlier, realty stocks were overpriced due to exaggerated land bank
valuation by developers. Now SEBI's new guidelines will ensure realistic valuation
of real estate companies on the basis of their land banks, which in turn will
result in realistic pricing of the realty IPOs in future. Nevertheless, those
who wish to invest in realty stocks should play safe by looking at the history
of the real estate company's promoters and quality of its management.
In the overheated market where speculation was rife, many investors made fortunes
on short-term investments from the booming business of pre-launches.
Investors booked hefty profits by buying properties before the developer got LOl
or other requisite permissions and offloading the same at the time of the project
As long as market was buoyant, it was profitable for buyers to offload, because
they were sure of selling at a rate higher than at what they bought but lower
than the rate quoted by the developer. But now with property slowdown, some investors
have badly burnt their finger. The advance money (35-40 percent of the total investment)
paid to the developers has got stuck. In few cases, the promised projects have
not taken off even after more than a year of advance booking.
Then there are others who find to their dismay that the rates at which they booked
property have gone down over a period of time. And now they're desperately looking
out for the exit route in the cooling market where actual buyers are not coming
forward to bail them out.
In this backdrop, the number of pre-launch offers have come down considerably.
Property experts say that it is advisable to stay away from pre-launch investments.
Such investments are advisable only if the pre-launch offer is from a reputed
and trustworthy developer and it's a good deal from the price point of view.
Group investment, according to Subhash Lakhotia, is the success mantra in a situation
when there is uncertainty in real estate market due to overheating and subsequent
slowdown in some parts of the country. It not only provides the benefit of bulk
buying and diversified investment portfolio but also ensures that investor's money
grows through risk minimisation. Farooq Mohammad cautions that one should not
look for advantages of collective investment like better deals with better located
and large property and good tenant at the cost of unknown investment partners.
"Nevertheless, if one has like-minded and trustworthy partners, one must go ahead
and reap the benefits of group investments", he says.
According to him, it's easy for say, four people to get together and buy a joint
property. "Suppose they together buy a total of 20,000 sqft of office space with
a share of 5000 sq.ft. each. There is one common tenant and rental cheques can
come in the name of the holding company which has bought the property or can even
be bought on individual names but collectively. If one wants to avoid company
name due to taxation and other problems, then the property can be purchased in
individual names because tax difference between an individual and company is miniscule.
In a way it is better in individual names and the company can issue four different
cheques in the name of four persons, " he suggests.
This is the time when you should not rush through buying property. Instead go
slow and wait and watch for good deals. Now that there's a property slowdown with
a slump in transactions and developers are feeling the funds crunch, they have
to offer good deals to property buyers by redesigning packages in order to make
housing affordable. "Developers have to offer better deals with improved facilities
and lower prices. And it is time for buyers to grab good deals in terms of price
and payment terms", says Pradip Chopra.
Rakesh Purohit. General Manager, Jaipuria Group feels it is good to look for distressed/motivated
sellers. "Investors with short term planning may well settle for lesser margins
to keep their money rolling. As such, one may get some good deals", he adds.
In fact developers have already started doling out freebies to sustain their customer
base. These offers range from subsidized power back-up or subsidy on electricity
bills, interest rate subsidy, free property insurance etc. A Faridabad developer
has introduced special EMI scheme at concessional rates under which the customer
pays only the principal amount of EMI while the developer pays the applicable
interest till the consumer gets possession of the house. So property buyers, who
are reeling under the impact of higg, real estate rates and increasing interest
rates, should make most of the good offers/ deals. But they should do due diligence
about the deal to ensure that the property is not overpriced and market conditions
are favourable from the point of view of future potential.