Time and Tide wait for no one

Price is what you pay, value is what you get” – Warren Buffet

One of the most common misconceptions when it comes to investments is to believe that the market can be timed. Market speculators often boast about using various market timing techniques and fool people into thinking that by doing so they can achieve stupendous results. To believe one can accurately predict the behavior of a free market and benefit from doing so for a sustained period of time is foolish to say the least. A good investment is one that creates long term value and such investment opportunities exist in every type of market and at every stage of the real estate cycle. Therefore, when considered in this manner any time can be the right time to make an investment.

 

Ascertaining Value

In real estate a good investment is one that gives you a favorable risk adjusted return, is relatively liquid i.e. can be sold easily and for which maintenance costs are relatively low. Whether you purchase a house for your personal use or as an investment, it is important to first ascertain the right and fair market value of the product and then identify the precise time to close the deal. In order to identify an accurate fair market value, it is helpful to use all of the following three methods:

Rental Yields

With rental yields, in today’s market it is acceptable to expect a rate of return of 3% for residential properties. Suppose you select a 1BHK residential apartment you wish to invest in. After studying the market, you become aware that you can put this 1BHK apartment on rent and expect to receive INR50,000/- each month in rent. You are able to identify the asset management costs you will incur by way of maintenance charges, brokerage, major repairs, etc. You subtract your management costs, e.g. INR 1,00,000/-, from the total rental yield for the year to arrive at a figure of INR 5,00,000/- This figure must equal to rate of return you expect which in this case is 3%. Therefore, you should be agreeable to pay a price of approximately INR,1,65,00,000/- to purchase the apartment. Thus, based on your risk-reward appetite, a favorable market price can be discovered.

 

Ready Reckoner Rates

Another method of identifying the most accurate rate for a particular property would be to understand the ready reckoner rates of the micro market and the complex within which the product exists. The ready reckoner rate of two properties in the same micro market might differ due to several reasons, the most important being the connectivity of the property, the amenities available in within the complex and age of the building. Suppose you identify two properties within the same locality having a market rate of INR 25,000/- per square foot. Option A is A 2BHK apartment of 1000sqft in a single-story building built on lease hold land with no common amenities and parking slots that are open to the sky. Due to its limited features the owner might be willing to sell it at INR2,00,00,000/-.  Option B is A 2BHK apartment of 1000sqft in a new residential complex built on free hold land, having common amenities like landscaped gardens and a club house along with two levels of stilt parking. Due to its exclusive features the owner might quote INR3,00,00,000/- As both a buyer or a seller, the price you pay or receive for your property is first dependent on this identified rate, followed by the prevalent market conditions and finally your ability to negotiate. Either way, it is unlikely that you can avail a discount or demand a premium of more 20-25%.

 

Market Conditions

Finally, in order to get a real time understanding of what the market rate is it is helpful to gather information about past and current transactions taking place for the same type of property in the complex and the micro market. This information can be discovered with the help of heat maps, data from the SRO offices, local brokers, etc. It is difficult and not advisable to ascertain the value of a property using this method alone because the data sources are often scattered and the data when retrieved can be difficult to correctly interpret. Two properties in the same complex or micro market may have been sold for considerably different rates due to underling factors that are often not discussed by either party. Therefore, it is best to seek advice from an industry expert who is well versed in research, capable of interpreting data precisely and has the skills needed to identify the most accurate value using all three methods.

 

It is never a question of when you buy a property but always about how much you buy it for, at a particular time. In a bullish market, you tend to make frothy purchases due to the underlying sentiment. Similarly, in a bearish market people shy away from selling out of a fear of getting a price much lower than its value. Simply put, in a seller’s market a buyer will have slim pickings and in a buyer’s market a seller will find it tough to demand a premium. Therefore, when it comes to real estate investments it is always better and more appropriate to look for value investments rather than opportunistic or speculative investments.

“Views expressed are the personal views of the author. Any action taken based on the views will be the responsibility of the user alone.”

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