It is right time to buy! BUT not anything or everything

Joe Verghese
Colliers International
Is this the right time to buy a property? My short answer to that question is normally a ‘Yes, but it depends on a number of factors and the view you have on the market’. So, the real question is what factors do you need to take into consideration when deciding whether it’s a good time to buy?

Economic outlook: A lot of buyers still feel that the economic outlook of the country is just got a rosy picture and considering the pain being felt across the global markets; India would feel the impact and pain of the same before things get better. They cite lack of sales and earnings growth across sectors, potential NPAs in the banking system as well as the gap between economic reform expectations versus the reality as the reasons for concerns. If you are part of the camp that from an economic perspective thinks that India is heading for a slowdown before things get better, probably in that case, there is no reason to read the rest of this article. In my view however, relative to other markets, the opportunity that India offers to investors is unparalleled and India continues to have a chance to be a bright spot in an otherwise gloomy global economic scenario. In short, things should only get better from here.

Rationale for buying: If for self-use, buying now is a golden opportunity. Lock in on location that you would like to reside in, shortlist the best options within your budget in that location and go to the developer with your cheque book. The average developer today values cash-flow as margins are getting eroded daily due to holding costs such as financing cost and escalating construction/ labor costs. His primary problem today is that there are a lot of window shoppers but very few actually signing off on the dotted line. The reason for this in my view is what I would call the ‘fear of potential loss of opportunity’. What if a better project with better facilities gets launched tomorrow at better price? Buyers tend to face this problem when products are not flying off the shelves and do not feel that what they like today may not be available tomorrow or could face a high price escalation the next day. If the purchase is for investment, a few other considerations need to be taken into account.

Eyeing for the bottom: It is common knowledge that across all markets, sales velocity have been stagnant and prices have not really risen taking into account inflation, rising cost of labor, construction delays, interest costs etc. While it is true that the average prices/ sq feet have not seen extensive decrease in most markets, the decrease has come in the form of smaller configurations leading to lower ticket prices, schemes like 20:80 where the developer is reducing interest costs for the buyer as well as eliminating costs associated with delays from the buyer’s purview. Taking all these into account, the relative costs have come down between 20%-30% in each market. Any more drop would not be financially feasible for the developer and would result in quality issues in final delivery (especially at current land and construction costs) so, in my view, we have hit the bottom.

Addressing delivery concerns: This is one of the primary concerns as customers today are not sure if they would get what they are being promised by the developer. There is still too much in the fine print protecting the developer in case of delays and he still retains the rights to change designs, quality specifications etc. The passage of the Real Estate Bill in the parliament should in my view be a game changer in building confidence in this area but the industry is clearly bearing the brunt of the excesses money flow between 2005 and 2009. When choosing a product for purchase now, the buyer should take into account the track record of the developer, value of his brand (how much it matter to him if the brand gets tarnished by delays) and financial viability (is the pricing or features too good to be true?) as no developer is going to push through a deliver a loss making product just because he has promised it. The price of execution can drive them to bankruptcy and they would rather walk away from a half finished loss-making project.

Outlook for demand: If the purchase is for investment only, this will be an important factor to consider. The housing shortfall numbers (20+ million) that get thrown around on the back of the undeniable drop in sales confuses investors. In my view, this is purely an inventory pricing versus demand mismatch and developers are learning over the last 3-4 years that at the right price, if the firm has a strong brand, products sell. Further, considering more than USD 9.0 Billion being invested in start-ups, over90 million sq feet of new office space absorbed in the last 3 years, it is evident that jobs in corporate India are being created more faster than they are being axed (a problem today in more developed economies). In my view, the latent demand is very strong but price appreciation expectations need to be more realistic going forward. The yearly doubling that we saw between 2004 and 2008 is unlikely to happen too soon but there is still money to be made in investing in real estate today.

In short, if you are positive of India’s economic outlook, buying for the right reasons, checked the credentials of the developer and done your research on the shortlisted project, this would probably be the best time to buy or else you could be at the risk of losing this opportunity.

Surabhi Arora, Senior Associate Director- Research, Colliers International contributed to the article.
Source : moneycontrol.com