For a long time, investors had largely steered away to invest in residential housing as capital appreciation was almost non-existent, and rentals were unattractive. Today, housing prices – which had remained more or less unchanged for several years before the pandemic – have increased. Rental rates are also increasing steadily.
For many years, the capital appreciation from housing investments rarely went above 3% annually. Can real estate investors now hope for higher returns on housing? Yes, but there are provisos. Read on to understand how and when the residential real estate can be a lucrative investment option.
First of all, housing price growth will be gradual – so, as before, residential property investment remains a game of patience. It is essential to understand that real estate developers cannot indiscriminately increase prices. The market is still very cost-sensitive.
One of the main reasons why housing prices have started increasing is because developers have no option. Builders will always seek to keep their prices competitive, and the cost of development has experienced massive inflation.
The process of construction material inflation has been going on for over two years now, but developers initially absorbed the added costs not to disrupt the returning demand. Now, builders face a need to remain viable as businesses.
Also, there is good demand for the right kinds of homes, and increasing demand is always a sure precursor for rising prices.
Is this the right time to invest in housing?
Despite recent marginal increases, prices and home loans are still lower than in a couple of decades. The current price and interest rate advantages will begin to decrease in the next few months, so there is no time like the present to invest and benefit from the lower acquisition cost.
The lower prices of under-construction properties by reputed developers add another level of potential profitability. But while capital appreciation is a great investment motivator, remember that the price growth we are seeing now is not the same in all housing types. Which gives rise to the next question.
What to invest in – affordable- mid-range, or luxury housing?
Not all properties will appreciate it. Because of the robust demand for them, prices for mid-range and luxury homes in tier 1, tier 2, and even tier 3 cities will rise steadily. In some locations of the bigger cities, we have already seen a 3-4% price growth for such properties.
The same cannot be said for affordable housing, which is currently in very low demand in most cities. The prices for affordable housing (generally speaking, homes costing between Rs. 25-50 lakh) will not grow as long as long demand remains low.
Homes in integrated townships are an excellent choice because townships deliver fully on the lifestyle aspirations currently dominating the housing market. Villas are also in high demand because there is now a massive appetite for independent housing, which began during the pandemic and continues to the present.
Even if one had not intended to invest a larger sum in housing, it makes sense to leverage the budget with a home loan and go in for a bigger property by a good builder in a good area. The more one invests in size and quality today, the higher will be the ROI. A luxury home purchased in the right location will bring great returns over the next few years.
What are the best locations to invest in residential housing?
One maxim of real estate investment always holds – location matters. Investors should now look beyond the ‘usual suspect’ expensive central areas. Many companies, especially in the IT industry, continue to offer flexible work and even work-from-home options. This means that people can continue living in less expensive but well-connected suburbs and buy larger homes within their budgets.
What are the most lucrative flat sizes for investment?
In apartment sizes, the best-selling configurations currently include 2, 2.5, 3 and 3.5, and 4BHK sizes, in projects with excellent lifestyle amenities that ensure a good quality lifestyle for residents.
Ready to move or under construction?
As already mentioned, under-construction projects can be a good bet, but investors should look for at least 40-50% completion of the project and personally verify ongoing construction progress. This precaution can be relaxed to some extent if there is sufficient assurance that the builder can complete the project on time and per specifications.
Stay away from anonymous developers’ projects, especially if they are under construction. Despite RERA, timely completion of projects remains a challenge for developers with insufficient external funding. Strong builders have enough capital and can often also raise private equity funding.
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- How affordable housing can propel the growth of the real estate
- Profits on Housing Investment – Past, Present, and Future
- Ready-to-move or Under-construction? Which option you should go for
By: Akash Pharande, Managing Director – Pharande Spaces.