Real estate investments in india
For those considering investments in real estate, India offers a wonderful opportunity. And the reasons being:
a. Indian economy is in good shape. Its GDP has shown sound growth over the last ten years. Increase in per capita income is leaving more disposable incomes in the hands of individuals.
b. More disposable incomes means more demand for goods, and more demand for goods and services, translates into good prospects for other industries. This in turn increases disposable incomes in the hands of others also. Substantial amount of these disposable incomes is finding its way into real estate, primarily housing sector.
c. Interest component and some amount of principal component out of loan installments are deductible from taxable income. 30 percent of rental income is also exempt from tax.
d. Housing loans are no longer expensive, as interest rates have stabilized in the country.
e. Rationalization of tax structure has resulted in tax compliance. These tax collections are being deployed on infrastructure projects like roads, railways, airports, power units, etc., which is good for real estate.
f. Government policies are designed to lure foreign investments, and encourage local investments. This augurs well for economy and real estate.
g. Inflation is brought under control. Today, the country expects inflation to remain within 5 to 6 percent for a foreseeable future. This makes the country a good place to live in after retirement.
h. Political stability within the country and amicable foreign relations create environment conducive for businesses and living.
i. Population of the country has not yet reached a stable level, which means, the demand for real estate will continue unabated for another 2 to 3 generations.
j. The prices of real estate in India have not reached the levels that are prevailing in other developed countries.
k. Recent statistics reveal that housing sector makes up 80 percent of the real estate market. And still there is a gap of almost 41 billion sft in demand and supply. The sector is expected is growing at the rate of 30 percent per annum.
Indian real estate market can be broadly divided into;
a. Agricultural farms
b. Residential properties
c. Commercial and office properties
d. Recreational properties
Salient points related to investments in agricultural properties:-
a. Bankers offer loans for purchase of farms. However, these loans are only for Indian citizens.
b. Cultivating crops like vegetables, or horticultural produce brings in handsome profits. Indian climate makes it a good place for growing flowers and fruits that are in demand throughout the year in different parts of the world. Tea and coffee plantations are other forms of agricultural properties that are not only located in beautiful places, but also fetch good returns.
c. Agricultural income is taxed at lesser rates than other non-agricultural incomes. However, some agricultural incomes, like those from tea and coffee plantations, are taxable at normal rates.
d. As of now, the government decides the prices of cash crops like rice, sugar and wheat. Nothing, however, prevents farmers from seeking better price for their produce.
e. Prices of farmlands vary from rupees twenty-five thousands per acre to rupees 10,00,000 per acre. Tea and coffee plantations may cost even more. Prices vary as per fertility of the land i.e., annual yield from the land, proximity to cities, infrastructure like water, power and roads, etc.
f. Farms can be given on lease. However, relevant regulations must be examined and local practices must be studied to avoid any disputes.
g. Major risk factor is the dependence on monsoons for cultivation.
h. It is advisable to purchase the property after consulting advocates.
Salient points related to residential purposes:
a. Bankers offer housing rates at competitive rates, and on competitive terms. Even non-resident Indians can avail housing loans.
b. Old buildings command lower price, when compared to new buildings. Cost of construction is based on the quality of construction and amenities. Generally, the division relates to clients from middle class, upper middle class and the rich. As of now, middle class people go for constructions in the range of Rs.700 to 1750 per square foot. Sometimes, they opt for city outskirts, where they can buy independent houses in the same budget. Upper middle class pays Rs.1800 to 3000 per square foot. The rich may pay Rs.5000 per square foot. Sanitary fittings, flooring material, electrical fittings, painting and external elevation are the items, which the builder manipulates. The rich get additional facilities like swimming pool, gym, club, etc., for what they pay.
c. Middle class prefers proximity to transport, markets, schools, etc. The rich seek seclusion somewhere within the city. Rich prefer independent palatial houses even though security is a problem. By opting for group housing, or row houses, the rich are able to overcome their security issues.
d. People with disposable incomes are now purchasing vacation homes and second homes. These are generally located at far off scenic places. Sometimes, such properties also fetch rent.
e. Prices of vacant plots vary from city to city, and as per proximity to amenities and future prospects of the region. Prices could be anywhere between Rs.800 per square yard and Rs.75,000 per square yard.
f. Tax benefits in respect of interest component and loan components, and rental receipts make investment in residential housing lucrative.
g. Risks relate to title and quality.
Salient aspects of commercial and office real estate:
a. Increase in businesses, whether Indian or foreign, is creating a dearth in commercial and office real estate markets.
b. New types of businesses like business processing outsourcing and software require special type of office accommodations.
c. Foreign goods are seeking a market in the country. They need more commercial space like shopping malls, offices and marketing facilities.
d. Even health care systems have acquired some commercial angle to them, as more and more hospitals are becoming corporate hospitals.
e. Location plays an important role for commercial and office complexes. As a result, cost of commercial construction is also higher. It can range anywhere from Rs.5,000 per square foot. to Rs.25,000 per sq. foot. depending upon the location.
f. Standard verification of title and approvals is essential.
Salient aspects of recreational real estate:
a. Recreational real estate now covers buildings and land for parks, golf clubs, cinema halls, swimming pools, etc.
b. Globalization has brought changes in these activities, as more and more foreigners and non-residents are seeking facilities that they have abroad.
c. Essel world, snow world, and water world, computer centers, billiards clubs, etc., are modern places for entertainment.
d. All such recreational activities generate returns as charges are collected for their usage.
Division of cities into tiers:
Mumbai, New Delhi, Calcutta and Chennai are often discussed as first tier cities of the country. Successive governments and municipalities have added new amenities to what they inherited from British era. Large business houses provided large scale employment which lured a large populace to these cities. This has increased the land prices in these cities.
Now, however, these cities are unable to keep pace with contemporary requirements of both external looks as well as internal convenience within a building. Demolishing old structures and redoing them is uneconomical because of skyrocketing land costs. Even government is unable to acquire land to add new facilities or expand existing ones.
This has proved as a disincentive for modern and sophisticated industries like software, and biotechnology. They have relocated to second tier cities like Pune, Bangalore, and Hyderabad, so that they can have vast and open campuses essential for their type of businesses. Land prices in these second tier cities are still affordable, and large areas can be acquired, as these regions are not bound by sea. It is also possible to redo them economically.
Higher cost of living in first tier cities also results in an additional burden of dearness allowance.
Amenities in second tier cities are soon catching up. Therefore, these cities offer better potential for real estate appreciation now.
Advantages and disadvantages of investing in real estate
Major advantages are:
1. Tax benefits in respect of interest and principal components on loans, and rental receipts. In addition, tax on capital appreciation can be postponed till the date of sale of the asset.
2. Real estate cannot be stolen easily like gold, cash or other household effects.
3. It can be mortgaged second and third time to avail some loan against the capital appreciation for some personal requirements.
4. It can be used as retirement planning method by ensuring that rent received moves in tandem with inflation.
Major disadvantages are:
1. It is illiquid - i.e., the owner can use only a minor part of equity in it. To use the bulk, he or she would have to sell it.
2. Title can have problems. A stringent carefulness is essential before purchasing real estate.
3. Local laws and practices need to be understood.
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