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Is it Worthwhile to Invest in Property in India
The Indian economy has been growing at a marvelous rate year on year for the last 6 years. Aided by this growth wave, many industries in India have expanded in vast proportions. One area that has been grabbing significant attention of global and local investors alike is the Indian real estate. Let us take a look at the history of Indian real estate in the last 13 years or thereabouts. The property market in India had reached a trough in 1997 falling from the peak levels it had attained in 1995. The fall in the property values was significant, ranging between 30% and 60%, across different locations in the country. A general economic slowdown and very high interest rates were cited amongst the various reasons for this fall. This trend started reversing in 1998. In the years that followed, retail credit was made easily available for acquiring properties. Several banks and finance companies actively offered property loans for acquiring or constructing residential or commercial properties. The interest rates had also started declining thus making the environment conducive for offering credit. The property market therefore, started warming up and showed signs of improvement till 2001-02.
From 2002 onwards, the market showed a distinct momentum and property prices leapfrogged at an astonishing rate. The period of 4 years from 2003 to 2006 saw an exceptional surge in property prices across the country. During this period, the increase in property values ranged from 75% to over 300% for different types of properties. The prospects of significant industrial opportunities brought about by special economic zones resulted in land values skyrocketing by a 500% increase in some locations. The markets had overheated and a reversal was imminent. The cooling down began in 2006, when the interest rates again started an upward trend. In just about 18 months beginning mid-2006, the interest rates went up by 4% to 5%. The appreciation in property values slowed down and almost came to a standstill in 2007. This had a definite adverse impact on the credit off-take in the market. The market became sluggish and values started depreciating by early 2008. The realty sector in India is currently finding itself on the threshold of a correction. Experts opine that this correction will continue till end of 2009 or early 2010. It is however felt that the Indian economy remains fundamentally strong and when the interest rates fall over the next year or so, the property markets will look up again. This brings us to the core question of investments in properties in India. In a market where property values have swung up and down over the last 10 years, how does one evaluate the viability of investments in properties? This question has to be analyzed within a defined perspective. It is important to differentiate between an investor who is looking at investing in the properties for the short term, and the investor who is operating with medium to long term investment outlook. Investor with a short term investment outlook A 3 to 4 year timeframe is defined as short-term in the context of real-estate. For the short-term investor in a property, the message is straightforward. The investments in a property reduce liquidity. Therefore anyone who is playing short-term in the property market needs to carefully consider the following two risks:
Besides the above risks, it is also pertinent to note that it is not easy to exit an investment in a property quickly. It takes its time. One should therefore desist from investing in property with a short-term outlook, since there is no time to work on and mitigate the impact of the risks on the investment. Investor with a medium to long term outlook A medium term can be defined as a 5 to 7 year period and a long term period as 8 years and above. Unlike the short-term investor, the investor with a medium to long term outlook is much better placed to enjoy satisfactory returns out of his investment in a property in India. The rationale for this thinking lies in two key drivers that have the ability to impact the property prices. These are (a) Growing demand (a) Growing demand The economic stimulus triggered in this country by consistent years of good economic performance, activated many other related phenomena, which have spurred the domestic demand. These include the following: Urbanization - The process of urbanization has been the most spoken about. In the two decades from 1991 to 2011, the number of urban households is estimated to have doubled. From about 40 million in 1991, they are estimated to grow to 80 million by 2011. This means more earning power and requirement of more houses and offices in urban areas. Declining household size: The average household size has significantly dropped in the same period. In 1991 it was 5.50 persons per household, whereas by 2011, it is estimated to be about 5.05 persons per household. If figures for urban areas are culled out, the decline will be much more pronounced since there is a proliferation of nuclear families. This pushes up the demand for houses. Affordability in housing: In 1995, for someone to own a house, the house would have cost an amount that is nearly 11 times his annual income. As of 2008, cost of the house to be bought is pegged at about 5 times the annual income. This improvement in affordability is the result of growing income levels on the back of stupendous economic growth. This would naturally mean, more people can and will buy homes. Growth of urban middle class: The proportion of urban middle class (income in the range of Rs.200000 per annum to Rs. 12.5 Millionn per annum) in the total urban population has increased from 45% in 1998-99 to an estimated 63% by 2009-10. This will cause prop-up domestic consumption. Availability of Credit for housing: Availability of retail credit for housing has significantly improved. The ratio of mortgage loans to gross domestic product (GDP) in India is just 6%. In comparison, China is at 10%, Philippines 12%, Thailand 16%, France 29%, Germany 52% and US at 71%. This reflects the large potential that remains to be realized in India in terms of growing its mortgage credit. Due to a combination of above factors, the demand for property will continue to grow. As per National building organization, the shortage of homes was around 20 million units in 2000. This number is expected to grow to over 26 million units by 2012. It will take at least 15 years for the country to bridge this gap. This growing demand will keep up the pressure on property values. (b) The infrastructure gap Another equally important factor that an investor should consider is the potential for infrastructural growth in India. Even with a serious handicap in our infrastructure in terms of roads, transport, airports, ports, power and urban development, the country has achieved spectacular growth rates. If these facilities improve, the economic growth will multiply. In the recent years, we have seen steps to encourage public-private partnerships (PPP) in areas of infrastructure. A classic example of the success of PPP is the telecom sector. It is also seen in airports and in the power sector. In the coming years, India will see a significant amount of investment going into infrastructure. These improvements will make our cities and towns better places to live, with the availability of improved urban facilities and render a positive impact on the property values. But infrastructural improvement cannot happen quickly. It is reasonable to estimate that it will be at least 5 to 7 more years, before one can see the beginning of world class infrastructure in India. In view of the above, there exists a strong case to conclude that investments done in properties in India with a medium to long term outlook will be viable for an investor. Over this period, the returns that accrue to the investor through capital appreciation and rentals will more than neutralize the interest and other costs. Going by the past trends interest rates will surely glide through at least one rise and a fall in 5 to 7 years, thereby defusing any abnormal impact on interest costs. Besides, a medium to long term outlook provides sufficient time for the investor work on and manage the risks that are confronted in the short term.
>> Read more articles written by Chillibreeze writers:1. Articles related to Content and Outsourcing
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