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Should you invest in a second home? written by Rajas Kelkar Express News Service, published in The New Indian Express. February 2, 2018

Many people invest in residential property to ensure a steady supply of income through rental, especially to support retirement life. However, there are risks to this model of funding old-age expenses because there is no guarantee whether demand will remain strong.


It is no secret that two of the most common assets Indians love to own are gold and property. An average household puts 77 per cent of total assets in real estate, according to RBI&rsquos household finance survey published late last year. These include residential buildings, buildings used for farm and non-farm activities, constructions such as recreational facilities and rural and urban land. This is very different from households in rich countries like the US where only 44 per cent of the total assets are in real estate. Financial assets like shares and bonds account for a significant share in those countries. Most people in India rely on real estate for retirement or generating an additional rental income. However, there is a risk to this model of funding old-age expenses or creating an additional rental income.


Affordability not there yet


A paper published in the Reserve Bank of India monthly bulletin recently highlights how affordability is poor in major cities. It measures affordability (affordability measure or AM) as the ratio of the equated monthly instalment to the monthly income of the household. A home becomes affordable if the EMI is less than or equal to 30 per cent of the monthly income. Lower the AM, more affordable is the loan. The paper lists cities on the basis of this parameter. Mumbai and places around the city such as Thane, Navi Mumbai, Kalyan Dombivali, Panvel, and Mira- Bhayander remain the most unaffordable in the country for people belonging to the economically weaker section, low-income or middle income. Cities like Chennai and Bengaluru also remain out of reach for most people. With interest rates stabilising in single digits for home loans and the government interest rate subsidy for affordable housing means many in the low-income strata can buy houses again. Government intervention is helping the economically weaker section. According to one estimate, with interest rates at a decade low, stagnant property prices and a steady income growth, affordability could pick up soon.


Regulatory intervention


Since May 2014, a significant change has happened in the way the real estate sector is regulated. The introduction of the Real Estate Regulation Act (RERA) is a milestone. The demonetisation of high-value currency notes, the introduction of the goods and services tax and Benami Property Act 2016 are making investors step back and assess their finances. A fund manager at a leading mutual fund pointed out investors with surplus funds found it easier to buy property with more cash in the past. The declared value of the real estate asset used to be lower than the actual money paid. However, most states have increased the stamp duty. In a &lsquoless-cash&rsquo environment, the margin for misrepresenting property value is, thus, limited. As a result, investing in all assets is the same from a regulation as well as tax standpoint for most people.


Investing in property


Going forward, most experts believe that as incomes rise and property prices remain stagnant, there could be a revival in sales of real estate companies in the residential sector. An indicator of that is the price trend in the share price of certain companies that are big in residential property development. Godrej Properties, the Mumbai-based real estate developer, has witnessed the share price more than double in the past one year. Similarly, residential developers in the South, like Sobha, have seen the share price moving in that direction, too. One can read that prospects for growth in real estate residential development are bright as investors are willing to bet on the future. The other theory is that with interest rates firming up everywhere, people tend to invest less in equity or equity-linked investments. While this may be one key reason why money is being pulled out of equity markets, it is not a compelling reason for investors in India to dump Indian shares. If analyst commentary post December 2017 quarterly results is anything to go by, corporate profit growth is set to revive in India over the next 12-18 months. Investors may not pull out money from equities and buy property. While the positive trend in share prices of realty developers indicates more property buying ahead, it does not mean buying property to rent out is attractive again. The average rental yield in major property markets is low at 2-3 per cent when borrowing rates are as high as 7-8 per cent and are expected to remain firm. An executive at a leading realtor in Mumbai said that people are better off keeping the money in the bank and earning an interest instead of renting out their property.


(The writer is Publisher and Founder at Simplus Information Services Pvt Ltd)