Done with another quarter, we are still wondering about real estate. Which way is the housing market headed? Will it be a good investment anytime soon? Should someone wanting to buy a house for their own use get off the proverbial fence?

Looking at well-formatted and analyst-curated reports did not give us the full picture, but rather painted a sanitised view of those who wanted to sell. We decided to ask Homananda, a purveyor of predictions that are bold, cheeky and without vested interest.

Dark clouds

He was in his solar-roofed hut made of recycled material and smart sensors. “I see dark clouds and no ray of sunshine,” he said ominously. “Will it rain returns for property investors?” we asked, going with his theme. “It will rain slow growth — project completion delays due to financing troubles, sales challenges due to credibility issues as well as falling profitability in the sector,” he said.

“Should we buy property as an asset to earn good returns?” we asked. He closed his eyes to find his vision, but we could feel he was reading our thoughts. We shut out views on all things ‘ sahi hai ’, lest they influence the answer.

“No,” he said, coming out of his 75-second trance. “There is a big shift in the segment which will lower returns overall. Prices increased on average by only 2 per cent between 2017 and 2019, as per data from ANAROCK (realty services firm). What should returns correlate to?” he asked. He was the one paid to answer questions, yet we knew the answer to this: “Risk.”

He added: “And you buy when the risk-return maths is favourable to you. I see risks such as developer defaults — small flames now, but turning to a larger fire; and returns are not likely to catch up.”

Growth ideas

“Are there any opportunities where the raging infernos people fear will be put out by a quick rain?” we asked poetically. “If you are a very sophisticated investor, say, a real estate private equity fund or a large fund that cannot only identify risks but can also mitigate it, yes, there are opportunities. But for a small investor like you, it is best to look for the right things and not buy on a prayer.”

“What should we look for?” “What are the three golden rules of buying real estate?” he volleyed the question. “Location, location, location,” we sang. He confirmed: “That will not change. If you are buying for self-use, look for locations that are convenient for your family and life situation. If buying as an investment, look for locations that will see price appreciation.”

“Can you name those locations?” We pushed a printed map and a sharpened pencil. He took out his tablet and a map appeared. Over that, office space off-take data showed up in different colours (and we peeked to find that Bengaluru was leading among cities), overlaid with population growth. Metro train launch, existing over-supply and even climate-change implications data popped up and slowly faded away. All that was left were many bright spots reasonably well spread out, and there were quite a few small towns in the North that glowed, even as an inventory overhang of over 30 months in seven major cities dimmed the overall outlook.

“Buy ahead of the hype as a lot of money will be spent selling dream scenarios of growth in places — about which very less is known — inflating prices. Ask for hard data on demand drivers and supply information; do not go by the seller’s rosy outlook based on early-stage infrastructure plans. And have a long-term view, as development and property demand will take years to play out.”

Due diligence

“If I know the right location, can I buy from any builder?” we asked. A crow outside cawed and we distinctly heard a ‘naw’. The tablet displayed a long list of builders of the past, present and future. As Homananda added different filters — on-time completion, financial strength to raise funds, construction quality and reputation — names vanished like groundwater in Chennai. He grouped them based on the cities they operate in and we were left with a small, manageable list.

“Good developers command a premium. Think of buying a house like choosing a car. Good brands are well-designed, have fewer maintenance issues and tend to have high resale value. The premium will only increase as there is flight to quality by buyers,” he said.

“Is the worst yet to come? Is a big price crash in the making?,” we asked, as we thought of the current state — the NBFC crisis that is hurting developers’ ability to borrow, cities with supplies that will take many months to be sold, PE funds moving to commercial space, weak job growth data and no turnaround on the horizon.

“There are many localised risks such as with your developer or demand in some price ranges. Minimise these by buying completed houses and checking the developer’s track record on the RERA website,” Homananda said, waving his assistant to let the next group in.

“It will be the worst of times before the best of times,” he winked as he knowingly misquoted Dickens, and handed us his bill with GST that we could pay on easy EMI.

 

 

 

 

 

 

The writer is an independent financial consultant

 

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