Buying property in a speculative market
Indian real estate market is growing at a rapid pace and the price has been increased by more than 100% in the last decade in metros like Mumbai and Delhi. On the face of ever escalating price rise in Indian realty market, it has been argued that speculation is behind it.
The present situation is realty markets like Delhi-NCR and Mumbai is quite paradoxical. Although sales have been down by 16% and new launches have plummeted by 30% in the past year, property prices have been going up in real estate markets like Delhi and Mumbai. Analysts have identified speculation on the past of developers as well as investors for the logic defying price hike of land plots and houses.
What is speculation?
Speculation is a risky financial transaction in an attempt to profit from short or medium term fluctuations in market value of a good/product. Speculation takes place in case of financial instruments like stock, bonds, etc and also in case of assets like real estate. Speculation banks upon price movements.
Speculation in real estate market
Real estate in India is speculative, especially in metros. Indian real estate market invites Private Equity (PE) investors as realty in India is considered a gold mine for investment purpose. Moreover, real estate involves low holding costs and property taxes which attracts investors.
Speculative practices have been blamed for over valuing land than their value and thus creating a bubble. Due to overpricing of homes, absorption rates have come down in major cities in the past year.
The mechanism of real estate speculation in India is one which involves Private Equity funds and over anticipation of Indian realty. The price is inflated by the investors who are looking for a high return of their investment in quick time. The PE funds lend huge sum to developers at unreasonable valuation and wait for the prices to go up. Once the prices go up exorbitantly, they sell off properties to make huge profit.
Investors enter a project at an early stage to make huge profit when the prices start to rise. As per estimates, of the total under construction properties in Delhi-NCR, almost 80% have been bought by investors.
Investment in Indian real estate has been around $20 billion during the period between 2006 and 2009. The ‘wait and watch’ strategy of realty investors becomes evident from the fact of the $20 billion, only around 10% has exited from the market.
Risks in speculative market
Realty market in India defies the logic of demand and supply forces. The prices have gone up by 12% in 2012, at a time when buyers were already finding it difficult to buy property in cities. In Mumbai, no property remains available under Rs 1 crore.
The finance ministry has urged the developers to lower home prices so that unsold inventory can be reduced. The PE investors would not exit the market without making a pre-determined profit and hence the inventory remains unsold. If this deadlock continues, Indian real estate may get stagnated.
Whether to buy property in speculative market?
Investors may sell off properties within a short period of time to realise quick gains. It can create a bubble if in reality there are less number of buyers.
In the present scenario, lot of developers are facing a severe cash crunch. Reserve Bank of India has refused restructuring of loans to developers, which means that they may have to sell stock at lower prices.
As you would not like to invest in a market where prices may crash in future, you may consider investing in less speculative markets. End user driven markets are less speculative than the investor driven ones.
As per analysts, South India is more end user driven than its Northern and Western counter parts. Cities like Bangalore and Chennai continue to witness inflow of young professionals who would like to settle down and own a home. In comparison, realty market of Mumbai and Delhi-NCR is more investor driven.
If you are looking to earn steady income from a house, you should look to invest in end user driven markets. End user driven markets ensure high rentals as compared to markets dominated by investors, as in case of the former homes do not lie vacant.
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