It’s an oft-heard story: an investor hits the jackpot by buying and selling properties in India. Also often heard is the cautionary tale of someone who has lost money in a project that never materialized or in which issues crept up, rendering the property impossible to sell. Is there a way to be more like the savvy investor and less like the unlucky one? Thankfully, there is. Buying real estate in India requires care and a detailed knowledge of ground realities. If you use these 10 criteria when gauging an Indian property, you will be likely to come out on top like the successful investors.
The Indian economy is expanding rapidly; in fact, the World Bank projects that India will surpass China as the world’s fastest growing large economy by 2017. This once-in-a-generation opportunity is going to make many investors fabulously wealthy. However, not all cities are developing at the same rate, and even within cities, not all areas are growing with equal speed. When deciding where to purchase, consider the following:
- Population growth of the city: Is it among the faster-growing cities in India? Rule out any city with a slower population growth. The entire reason for investing in India is to take advantage of its rapid development – so why risk putting your money in a part of the country that does not share that growth?
- Growth corridors within the city: When it comes to identifying the most promising areas of town, be mindful that population growth and job growth go hand-in-hand. A simple and accurate way to identify growth corridors is to look at the total square feet of Grade A office space – how much has been built, and more importantly, how much is under construction?
- Social infrastructure: Another factor that can boost the price of a property is the availability of social and lifestyle resources in the surrounding area. Enquire about new and proposed shopping malls, schools, state-of-the-art hospitals, entertainment outlets, and the like.
In India, property development typically comes first and roads are built later. That being said, major arterial roads tend to be planned and announced years before they are constructed. All good residential areas need quick access to thoroughfares so that residents can commute to other parts of the city. Be sure to understand plans for roadway construction (including road-widening). A good rule of thumb: If less than 2 km from the nearest major road, your property should be on a road at least 40 feet wide—and if it’s farther, at least 60 feet wide.
Beyond streets and highways, an expanding metro rail network is present in many cities in India. A metro station within walking distance of a property can increase its value. While metro access is not required for an investment to be sound, it can be a tiebreaker between two that seem otherwise equal.
- Property type
Real estate falls into four broad categories: agricultural, industrial, commercial, and residential. The first three have significant drawbacks. Agricultural properties, for example, are open only to Indian residents, not NRIs. Industrial and commercial properties tend to require larger outlays of capital, are less liquid, and carry the risk of high vacancy. If chosen carefully, their return will be in cash flows (around eight percent per year net of expenses) and appreciation in values (approximately five percent per year).
Residential property is the safest and easiest option for the typical investor. If done early, a residential purchase can offer a higher return than other types while also having a smaller ticket size and being easier to liquidate. Residential projects are usually villas (houses), apartments (condos), or plots in a gated community. And the earlier, the better—the best deals from developers come at the start of a project or prior to launch.
Just as in other parts of the world, not all developers are equally capable of delivering a good product on time. India has some excellent property companies along with its fair share of less reputable ones. To avoid the risk of your investment turning sour, check the organization’s track record. Evaluate the company’s credentials in four areas: financial strength, capacity to understand and meet investors’ needs, physical quality of construction, and adherence to timelines. Do business only with those who pass muster on all counts, because a failure in any one of these areas could be a significant risk to your purchase.
- Development stage
Within a project’s development cycle are different periods in which you can invest, each of which has its own return characteristics.
- Pre-launch: This is after the land acquisition but prior to the official launch of the project. Deals made during this period offer the best returns, but only if the developer is reputable and the land title has been properly vetted.
- Launch: This is after all government permits are in place and the developer is ready to commence construction. Launch prices are close to market rates unless you buy from an aggregating service that is able to negotiate volume discounts.
- Partly constructed: Most investors buy properties in projects that have already been launched and are midway through the construction process. While similar to the launch phase, prices tend to rise more slowly over the construction period so you will get a somewhat lower return.
- Completed: The purchase price will be highest for these investments and you will depend on inflation for your returns. Although these properties can earn rental income for you, residential rental yields in India are very low; you will be better off looking at commercial property if cash flow is your primary goal.
- Quality and specifications
Technical quality in India, even in projects within the same neighborhood and price brackets, can vary widely. Higher prices don’t necessarily mean higher standards. Look closely into the specifications and amenities of the particular project in which you wish to invest. The most attractive investments are those priced below similar ones in the area but which have equivalent or superior specifications. Usually, such pricing is possible only during pre-launch; once a high-quality project is launched, sales will progress quickly and prices will rise to meet demand.
- Project pricing
While appearing straightforward on the surface, property pricing is actually both an art and a science. No two developments are identical, and properties in India can vary enormously in terms of road access, appeal of micro-environment, and level of specifications and amenities. Furthermore, most neighborhoods in India support a very wide range of price points, thus making neighborhood-based generalizations tricky. Therefore, comparing projects in an area and determining the appropriate price of a project requires a fair bit of research and knowledge of the market. The best way to do this is in person or through a reputed agent who will give an objective assessment.
- Expected future price
Inherent in an investment is the anticipation of future gain. However, at the time of purchase, few investors sufficiently analyze the market to calculate an expected price range within which their property can later be sold. While this type of analysis is difficult—and, of course, the future is never certain—it is imperative to forecast the price growth for your type of property. Take time to examine the sales velocity of nearby developments, the rate of appreciation for each property type and at different stages, the pricing practices of your developer, the upcoming social infrastructure, and similar factors. The exercise of estimating future values will make you a more knowledgeable investor much less likely to be surprised by the market.
- Land title
India has high land prices and yet no land title insurance. Performing due diligence on the land title before a purchase is therefore crucial, but unfortunately difficult and impractical for the individual investor. Land ownership goes back decades, and any defect in the title of any of the previous owners can lead to litigation after the investment. To make matters worse, most real estate projects are the result of aggregating a large number of land parcels from different sellers. The net result is that a thorough title check can easily rival the cost of the property itself. In light of these challenges, most investors do a very cursory check on property title, thereby exposing themselves to unnecessary risk. One solution is to use a professional service that provides a detailed title check and title report for each property that it offers for sale.
- Investor protections
In most cases, a developer will commit to a timeline for completion of a project. The problem is, the penalty for failing to meet the deadline is on average very light—much too low to compensate the investor adequately for the delay. While it would be ideal to hold the land as collateral for security, an investor will typically lack the bargaining power to make this happen. Investors making a large investment should negotiate sufficient collateral to cover twice the value of their purchase, or use an aggregation service that does this for them.
If you wish to select real estate that will have lasting value, focus on these 10 criteria first. The more visible attractions such as landscaping, parks, and spas can come later. Solid gains—even the windfalls spoken of anecdotally—usually come to the prudent investor who does his homework. If you do your research thoroughly and bear these principles in mind, Indian real estate can offer you outstanding returns in the next two to five years.