Personal Finance

Don’t fall for these property ‘deals’

Meera Siva | Updated on April 28, 2019 Published on April 28, 2019

Given the current high-risk market conditions, caution beats returns-chasing

The property market is in a flux. With years of slow transaction, price stagnation and losses for developers and buyers, new ideas and models are being kicked around for potentially better returns. Buyers are expressing interest as these are perceived as good deals in the current context of developer distress. We look at some of the likely scenarios and analyse them, considering that the risk-return scenario is unfavourable in the current market and there are no real deals that are steals.

Bulk deals

One scenario is when developers stuck with unsold inventory offer bulk-buy discounts. For example, you may be offered four flats for the price of three. This can lead to you owning one floor entirely, with possibilities to rebuild and rent out creatively.

This is not a good idea. The discount you’ll get is only 25 per cent, and in a distress situation, that is not a lot. And discount is not the same as returns. Say, the price of one flat is ₹33 lakh, and for ₹1 crore, you get four. Alternatively, you can invest that amount in government bonds that give you over 7 per cent. Say, the price of the four houses (currently at ₹1.33 crore) only rises enough to cover the sales commission (about 2 per cent), registration charges (about 1 per cent), stamp duty (over 5 per cent) and other expenses. So, you will get ₹1.33 crore net — same as what you would get from the bonds, not considering taxes. Rental yields are 2-4 per cent for residential properties, and after accounting for maintenance, risks and hassles, the investment is not worth unless you expect prices to go up significantly.

Also, you are adding concentration risk by buying multiple properties in the same geography, type and developer. It may be better to diversify in some way — between asset classes ideally and within real-estate assets. Property is also illiquid; your returns must hence account for that factor as well.

It is also likely that the developer, if running out of funds or in a hurry to complete and sell, may have compromised on quality. You must ensure that the construction is good, as it affects your ongoing maintenance costs as well as resale value.

No certificate

Another case is where the flat is said to be completed, but does not have a Completion Certificate (CC). The developer may say that it is so because CC starts the clock on his taxes. You would be assured that it can be obtained any time as the work is already completed, and the offer may be sweetened with a discount.

You must pass such a deal. It is true that there are tax implications for a developer who has flats with CCs. As per Section 23 of the I-T Act, a notional income is deemed to accrue on completed vacant properties held as stock-in-trade by builders. However, based on Sub-section (5), there is a moratorium of one year. This was further increased by one more year in Budget 2019. For example, if a property received CC in 2017-18, tax on notional income for any unsold inventories must be paid in FY2019-20.

Given this, there is no reason why a developer will not get CC unless there is worry that it will be unsold for very long. You must insist on a CC before buying.

A CC shows that the building adhered to the sanctioned plan, and is just one of the steps to get an Occupational Certificate (OC). An OC establishes that no building rules and standards were violated, and the house was built to meet all the required specifications, as per the plan.

As a buyer, you need an OC to move into a house; it is illegal to live in a house without it. There have been cases in the past where, due to various issues, OCs had been denied and occupants were sent eviction notice by the authorities. Under RERA (Real Estate (Regulation and Development) Act), it is mandatory for builders to give OCs, failing which, owners can approach the regulatory body for action.

‘New’ boom

Yet another temptation is buying based on property market reports that talk of a boom in small cities. People in the South are attracted to growth stories from the North and vice-versa — basically, markets you don’t have first-hand knowledge of.

This is a dangerous thing to do, as data may seem like truth. But based on the source, method and intent, it can often be misleading — particularly if you do not know the area and cannot verify the facts. Also, projections based on smart cities or other infrastructure projects may not pan out in the expected time-frame or, in some cases, never. Also, predictions of growth in small cities have made rounds in the past as well — in 2007 and 2013.

True, a few saw strong price growth. For example, data from NHB’s (National Housing Bank) Residex index show that the house price index for Ranchi jumped from 107 in March 2017 to 154 in March 2018 (44 per cent increase). But these markets are riskier as there is not enough market depth — the demand/supply volumes are low and the prices can be skewed easily. There are also small cities where prices are falling — Bhiwadi in Rajasthan, for instance, saw its index fall from 142 in June 2016 to 111 in March 2018. Use caution as you need local information and support to understand issues and take decisions.

The writer is an independent financial consultant

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