It is a dilemma whether one should invest in metros, metro suburbs or tier-II
& tier-III cities particularly so in a falling market. Generally metros and their
suburbs offer ample opportunities for good return as compared to tier ll & III
cities. "These are characterized by fundamentally strong factors with a sequential
progression of industrialization, corporatisation followed by residential and
retail services development, offering great scope for end users", says Vaibhav
Dhingra of Sar Investment. He cautions that though capital values in tier-II and
III cities are low, one should not invest in cities devoid of commercial activity
and fundamental aspects of growth. He advocates investing in fundamentally strong
tier-II and III cities.
Farooq Mohammad, President Bangalore Realtors Association of India too, opts for
metros and suburbs for investment in the present scenario, as the negative impact
of slowdown may not be high. "There may be a plateau for a while but eventually
the graph will move up. " Amber Maheswan of DTZ says that as of today investment
in action-packed suburbs like Gurgaon in NCR. OMR in Chennai, BKC in Mumbai and
Madhapur/Gachibowli in Hyderabad will be more lucrative if these get liquidated
in next 2-3 years i.e. projects get developed and sold in the near future.
But it is not that investment in tier- II and III cities is not advisable. The
parameters for investing in these cities, according to Maj-Gen (Retd) Jayant Varma
of Knight Frank, depend on general attractiveness of the city including real estate
cost, cost of living index physical and social infrastructure. But the possibility
of earning appreciation is determined by the economic activities and business
environment of that city. He says that the possibility of earning appreciation
would be considered higher in the developing markets rather than in futuristic
Investment expert Subhash Lakhotia bets on investing in tier-III cities in the
current situations. "Even today prices in tier-III cities are quite affordable.
The concept of ownership apartment is picking up in these cities. In mature metro
markets, appreciations may not be as high and in some overheated pockets, prices
may even slide down." He advises to invest in fundamentally strong tier-III cities,
where buyers can also take advantage of cheaper home loans for buying homes below
Rs 20 Lakhs.
So whether you invest in metros suburbs or tier-II & Ill cities, as an investor
the key determinant is the value at which one is able to purchase property and
the scope of capital appreciation over that value.
COMMERCIAL PROPERTY VS RESIDENTIAL PROPERTY
Investment in commercial property makes sense, as despite property depression
in some areas, commercial property has by and large remained unaffected by price
fluctuations. In fact commercial property (both office and retail) rentals are
still rising, primarily because of the shortage of quality space. In the last
six months, there has been 15-20 percent increase in the rentals. As per Cushman
& Wakefield report, Delhi Mumbai, Bangalore and Hyderabad figure among top 12
global cities with high rental increases. A CBRE report says that potential demand
for office space is expected to remain strong in the short to medium term. Vaibhav
Dhingra of SAR Investments affirms that in terms of assets, commercial real estate,
both office and retail sector (selective retail formats ) should be investor'
choice for short-term investment. For a time horizon of three and beyond. both
commercial and residential real estate are attractive for investment. Lakhotia
adds that it is wise to invest in office property in suburbs adjoining towns of
metros, besides investing in upcoming malls. His advice is to invest in the bigger
sized malls. Bigger the mall, the higher the appreciation of investment. Leading
Kolkata developer Pradip Chopra sees good prospects for investing in IT Parks
which are already being leased out to well known tenants with a good lock-in period.
According to Dhingra, both land and apartments are assets, equally attractive
and contigent upon the city basis. An investor should invest in land and commercial
property in developing cities, and land and apartments provide good opportunities
in cities where there is a strong presence of MNCs providing the right target
segment to stay in apartments. Chopra recommends investing in apartments which
are better located in terms of choice of floor, view etc. His advice is to invest
in three-bedroom flats, which are most in demand.
But Lakhotia believes that the better option would be to invest in land that will
give better yield and mobility of investment. Ambar Maheshwari agrees adding that
land is always a good investment and likely to generate more consistent capital
appreciation than built-up property, though basic fundamentals of investment need
to be taken care of. Chopra predicts fall in land prices in next few months, particularly
in areas of cities where these high prices do not make any sense (like South Kolkata),
compared to the prices of apartments, thereby providing good opportunity for investment.
Farooq Mohammad of Bangalore's Silverline Realty opines that a lot depends on
what kind of capital basket one has. For the bigger basket one can invest one-third
of allocated fund in residential and two-third in commercial property.
Investment experts caution that fundamentals of risk vs return have to be taken
into account for each real estate segment. They warn against investing in places
where there is oversupply. Bangalore is already witnessing oversupply in residential
segment resulting in fall in prices which is expected to became more pronounced
in the coming months. DTZ India has predicted oversupply situations in commercial
real estate over the next year with Pune & Chennai leading the pack.
HIGH-END VS MODERATE PROPERTIES
In a slowdown market, is it advisable to go for high-end or moderate properties?
Ambar Maheshwari says that slowdown is more pronounced in middle to upper middle
segment of residential properties. The high-end properties, according to him,
are still holding on to their price points. Jayant Varma of Knight Frank endorses
Maheshwari's views, saying, "Recovery rate for invested capital in high-end properties
is usually higher than in moderate properties. This is so because market upswings
hit the moderate segment first and high end properties are last to have an impact
of the correction in the market."
According to Dhingra, high-end properties are generally less affected by the fluctuations
in the market as the target segment for the same would always have good cushion
to absorb the highs and lows of the market. He avers that investments in high-end
properties with long-term horizon even in a slow market will always yield better
But then investing in a moderate project has its own advantages. Lakhotia puts
it this way: "If one goes for moderate size property, the risk is minimized and
also liquidity may not cause a big problem specially in view of moderate payment
schedule. So those who have limited funds for investing in a moderate property,
they should look for such fundamentally good properties in various locations which
have been hit by the market slowdown and are experiencing price dips."
The cardinal rule in real estate is to choose right location and right builder.
Specialtists caution against investing in overheated area/ location. Says Maheshwari,
"In real estate, like in any other asset class, significant returns are expected
from capital appreciation than yield. Thus if a market gets overheated, the possibility
of significant appreciation diminishes. Rather, there is a risk of capital depreciation."
Vaibhav Dhingra, while cautioning against investing in markets where the prices
have peaked, advises property buyers to look at the macro picture to judge the
potential of a city/ area in terms of business potential, employment opportunities,
commercial office activity, infrastructure, supply-demand scenario and cosmopolitan
culture to asses the real estate growth potential.
In the opinion of Lakhotia, one should invest in land in areas, which are not
heated up. He finds tourist destinations hot for investment purposes. Location
contributes significantly to appreciation potential of any property. Pradip Chopra
recommends investment in areas or projects where there is a demand by actual buyers
such as locations near IT corridors or IT hubs. According to him, one can invest
in land in areas where much of construction activity is happening for IT and other
related activities or upcoming suburbs connected by Metro Rail or through good
public transport. He also favours investment in areas where the supplies are restricted
due to non-availability of land and where there is a great demand for apartments
from the existing local residents. He cautions against investing in areas where
a lot of advance booking done by investors or speculators in anticipation of a
Chopra observes that in Kolkata, most of the areas except Rajarhat are good for
investment as most of the apartments there are booked by actual users. The demand
is substantial but thereis a great demand of apartments whereas the supplies are
small. " Since in Rajarhat, 80 percent of bookings are done by speculators therefore
this area should be avoided for the time being for investments in land or apartments",
he adds. Farooq Mohammad prescribes investment in Bangalore North, suburbs and
Bangalore Central because according to him, these are the potential destinations
to invest now. .