10 Reasons to invest in real estate in current uncertain times -
Updated: May 12, 2020
Few our readers, apart from those associated in real estate industry might be mildly shocked to read the title. As the news of CoVid-19 & how it’s causing turmoil to the global economy dominates all forms of media, I am someone who is talking about investments in real estate.
Health and human life needs be of foremost importance everywhere
Having vowed so, let’s look at Top 10 reasons why I believe that the smart investor should seriously consider investing in real estate in these times.Before diving into the details, I would urge my readers to take some time out and write your comments on real estate as an investment destination, after completing the reading:
To begin with, let’s talk about investment in pre-leased and ready to move-in properties. As the name suggests, pre-leased (rented) property is commercial property which is fully constructed and rented out. When investor buys a property, the lessee/tenant still continue to hold the property and rent gets atoned to the new buyer. The new buyer earns the rent from the day they bought the property.
1. Peace of mind- Most of the lease agreements are long term in nature. They carry a lease term of 9 years,enhancement of rent by 15% after every 3 years and lock-in clause of 3 years. It gives peace of mind to investors who are looking to earn long term rental income.
a) Better returns than fixed deposit- Preleased/rented commercial property typically earn an annualized rental yield of 7% which is better than fixed deposit (FD) of nationalized bank which is between 4.5 to 5.7 percent depending on tenure.(https://www.bankbazaar.com/fixed-deposit/sbi-fixed-deposit-rate.html)
b) Stable asset class compared to equities- Since real estate demands a big commitment of investment at one go, it is suitable for investors who cannot handle volatility of equity market on daily basis. It is even more relevant in current conditions with instability prevailing in equity markets where VIX(volatility index) is at its peak.
2. Periodic rental increments - All Lease agreements carry a clause which states that rentals will be increased after certain period of time. Rent is generally increased by 15% after every 3 years. Example - If an investor is earning a rent of Rs.100,000 each month, it will be revised to Rs 115,000 after 3 years so their return on investment(ROI) gets increased to 8.05% from 7%. Similarly after 6 years rent gets increased to Rs 132,250 which means ROI or rental yield has now increased to 9.25%.
3. Benefit of taxation- Investors can save tax on rental income and can claim benefit of standard deduction at 30% because of wear and tear and cost of maintaining the property. (https://www.livemint.com/Money/lFQxW1tgXtRZKMvf4FqnVI/Rental-income-from-Indian-property-is-taxable.html)
4. Benefits of compound effect- Albert Einstein reputed to have said, 'Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it’. An Investor who invests in pre-leased property will earn a great benefit of compound effect. Since investor gets rent every month he can reinvest that amount and further create a corpus out of it.
5. Promotes Liquidity- Since you get a healthy rental income every month, stronger liquidity allows you to take care of your monthly expenses hence it increases the negotiation power of investors as they can hold the property for long time and are not desperate to sell it.
6. Increase in value of property- Till now, we were focusing on rentals.Let’s also pay attention to how investors can earn healthy appreciation in price of rented properties. Since rentals increase by 15% every 3 years, so does the underlying value of property. Hence if investor buys a property and hold it for even 3 yrs then he can get a blended return of 36% i,e 21%(3*7) as rent and 15% as capital appreciation.
However Investors should keep following things in mind before buying a property and can take help of their real estate advisor for doing it-
Investors should do a thorough survey of the area; they should check the prevailing rentals and potential of the area they are planning to invest in.
Investors should always invest in the properties occupied by good company's as they are running big business and are liable to occupy the property for a long period of time.
Investor should always insist on meeting owner or a responsible person of the company Operating from the property to get a better understanding of future plans of the company. This becomes even more important in this CoVid-19 era
Similarly, investors should also check the quality and age of the building they are investing. Good quality buildings will fetch big corporate and better rentals compare to other buildings in the same vicinity.
7. Demand and supply- It is accepted that absorption of office space will be slow as corporate will take some time to stabilize their business. But then the delivery of new supply will also be delayed because of absence of construction workers & it can balance each other to large extent.
8. Better negotiation- Because of uncertainty, investor is in a better position today to negotiate ready to move in properties. Developers who were already operating on thin margins can give some discount to facilitate the transaction.
9. Low interest rates- Due to slash is repo rate and CRR by RBI. Cost of funding for bank has come down and they are now passing on the benefits to their customers.
10. For under-construction projects, developer will surely come up with various benefits for their customers like subvention scheme, that only require paying nominal investment at the time of booking and balance on delivery of project. This can be beneficial for investors or end users who do not want to put major part of their savings in property now. Investors need to be very cautious in picking such projects and should go with reputed developers with proven track record only.