Investment Ideas

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With so much unsold inventory, is the right time to invest into real estate?

16 Jul, 2016

Most of the Indians consider property as the most preferred option of investment. You might have got advices from people around you to invest in real estate and earn huge profits. After all, a property which used to be priced at some lakhs five years ago now costs few crores. So if you buy a property today at certain price, you can sell it few years later at double the prize, a great investment indeed.

But the present reality is quite different. The Indian properties are currently so over priced that there are not many people interested in buying. Most of the middle class Indians in recent times cannot afford to buy a property. Hence, the real estate business is facing all time slowdown and sales have fallen drastically. As a result, huge inventories of unsold properties are piled up at the offices of the developers. The numbers show there are nearly 7 lakhs unsold real estate units in the market of 8 major cities of India. It would take two-three years to clear this backlog of unsold inventories. Therefore, in present scenario, you need to think thoroughly and consider all the aspects before investing. Here are the reasons why it is not the right time to invest into real estate:-

Delayed delivery of new projects

As already stated above there are huge backlog of unsold inventories with the developers. Hence, they are selling these unsold inventories at hefty discounts and many attractive schemes are announced to lure the buyers. But if you buy the properties now, your money will provide the developers the cash flow they needed to complete the old projects. Hence, they will finish the old projects first and delivery of your project is going to be delayed for a considerable period of time.

Huge disparity between borrowing costs and rental yields

Most of the people in India borrow from financial institutions to invest into real estate.  Financial institutions are lending money at nearly 10 percent interest rate, but the rental yield i.e. the rate of income return over the cost associated with an investment property, including the maintenance costs is as low as 2-3 percent. This huge disparity between borrowing costs of the property and its rental yields makes investing in real estate not an excellent option at this time.

Underutilization of the assets

One of the benefits of an investment is its flexibility. As an ideal scenario, an asset should be feasible enough to be invested as well as withdrawn in small portions. But properties are large and can be utilized as a whole only. This leads to properties being the most underutilized assets and hence investing into real estate is not recommended at this time. 

The bubble has burst and reality has come to forefront. Real estate once a flourishing market, is suffering from worst economic slowdown of recent years.  The prices have fallen, but not enough for the buyers to start buying again, and with low rental yields investing into real estate does not seem an intelligent decision. The developers are offering freebies and schemes in the hope that the price will rise in future and they will overcome the losses. But with the prices still falling, unless you are in dearth need, it would be better to stay away for some time and wait for the economy to recover before start investing again.

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