Real Estate, a Safe and Stable Investment: JC Sharma, VC & MD, SOBHA
January 10th, 2019
Traditionally, property investment has been viewed as a safe and stable long-term asset in India. It is often an emotional decision for Indians and is perceived as an indication of one’s status and wealth in the community. Over the years, the importance of owning property as an asset has only increased. This is reflected in the high returns reaped by many investors in land and real estate over the last few decades. It has been more so with increasing disposable income and urban growth, making Indian cities a real estate goldmine for long-term investments. According to a recent report titled ‘Indian real estate and construction: Consolidating for growth’ by KPMG India, the real estate sector is expected to reach USD650 billion by 2025 and surpass USD850 billion by 2028.
Why invest in real estate over other options?
While there are plethora of investment options available such as mutual funds, stocks and bonds, real estate continues to reign as a preferred choice. This is because movements in real estate values are less dynamic than in the stock market. Additionally, close to 75% of the funds made available by the banks veer towards real estate investment. Further, the loans taken for real estate investments attract tax benefits up to Rs.2 lakh on interest paid towards the home loan in case it is self-occupied and Rs.2 lakh per annum on the housing loan if not self-occupied.
Moreover, a higher amount of home loan can also be sought by including the spouse’s income during the application. Real estate also brings in a continuous source of income through rentals even when a loan is taken to make the investment. These yields can be anywhere in the range of 5-6%. If the asset is for self-use, it helps in saving rental expenditure. This, in turn, becomes a disguised income. Besides offering the comfort of having invested in a hard asset, the value appreciation offered by real estate also makes it appealing for investment. Similar benefits cannot be reaped with other assets, as no other forms of investment provides substantial loan assistance by the banks. Besides this, there are risks attached with other options such stocks and shares despite good returns. Therefore, buying a house is safe investment, as it reduces the overall volatility of an investment portfolio.
This is one of the most conducive periods for availing home loan given that the interest rates for home loans are in the 8.75 to 9 %. If the prevailing interest rates are pitted against the average annual rental yields of 5 to 6%, the difference between cost of rent and owning a home becomes negligible.
Schemes and Incentives
Buying property is also becoming increasing affordable due to several schemes and incentives introduced by the Government. One such scheme is the Pradhan Mantri Awas Yojana (PMAY) Credit Linked Subsidy Scheme (CLSS). Under the CLSS scheme of PMAY, a first time homebuyer can avail a benefit of INR 2.7 lakh for purchasing a house of 1,615 sq.ft. of carpet area if the family income is up to INR 18 lakh. Additionally, a subsidy of 6.5% subsidy is applicable on home loans up to INR 6 lakh. This is for a period of 15 years. Similarly, for home loan of INR 9 lakh, an interest subsidy of 4% is available and for loan amount worth INR 12 lakh, an interest subsidy of 3% is available. The home buyers can avail these from any bank or housing finance companies.
Besides these benefits, the Government had increased the carpet area under the CLSS scheme. The carpet area in the MIG I category of CLSS was increased to up to 120 sq metre from the previous 90 sq metre. Carpet area for MIG II category of CLSS was increased to up to 150 sq metre from the previous 110 sq metre. These figures have been revised further. Now, MIG I from up to 120 square metre has been increased to up to 160 square metre and MIG II from up to 150 square metre has been increased to up to 200 square.
Win-Win Scenario for Buyers and Developers
Real estate investment has become all the more attractive due to the implementation of progressive reforms such as RERA and GST by the Government. In India, real estate sector had been primarily unorganised and unregulated, leading to delay in delivering of projects. This affected the credibility of sector and reiterated the need for a regulatory body to bring transparency in the sector and protect the interests of homebuyers. RERA was rolled out to bring an effective regulatory mechanism to resolve consumer grievances faster. This has increased transparency, accountability and credibility of the sector, making it a buyers’ market.
Similarly, GST replaced the multiple taxation regime with a uniform and simple tax structure, promoting ease of doing business. Besides this, developers can now avail 100 percent input tax credit (ITC) on raw materials, reducing the construction costs and translating into better margins. This, in turn, will help them pass on the benefits to buyers. Moreover, unlike before, where multiple taxes including VAT and service tax were levied on a homebuyer, now a uniform tax rate of 12% will be applicable on the purchase of an under-construction house. This will eliminate the chances of double taxation. Further, the GST for affordable housing has been reduced to 8%, making it a win-win situation for both homebuyers and developers.
While it is clearly evident that real estate serves as an asset that can be relied on to yield, it is important to keep in perspective certain indices before making the investment. Some of them worth considering are location, valuation of the property, the investment purpose, the expected cash flows and appreciation besides ensuring the development is initiated by established developers.