Raj Khosla is a managing director of MyMoneyMantra
In recent years, the real estate business has been severely buffeted by a series of disruptions, and Covid-19 unfortunately proved to be the proverbial ‘cherry on top’. Construction activity is restricted, sales are down and demand is thin, leaving builders with unfinished projects and a humongous inventory of unsold units. At last count, there were nearly 13.45 lakh residential units, measuring 1.58 billion sq ft, lying unsold with builders; and this is without accounting for the secondary market.
Commercial real estate is doing no better. After the pandemic struck, demand for office space has slid down a seemingly never ending slippery slope due to work-from-home rules; and then there is the inevitable downsizing by companies. According to one estimate, in the eight largest cities across the country, a staggering 6.3 million square feet of office space was surrendered in the first half of 2020.
Winston Churchill told us to “never let a good crisis go to waste”. The multiple travails of the realty sector does indeed table a clear opportunity for buyers. Whether you are planning to purchase your dream home or looking for commercial space for your business, this could well be the best time to take the plunge. Property prices in major cities across India have been almost flat for the past few years. If you take inflation into account, property prices have actually corrected almost 15-20 percent.
Right now, cash-starved builders are desperately trying to offload their inventories and are pampering buyers with freebies and additional benefits. Depending on an individual’s negotiating skills, one can grab a good deal. Keep in mind that a person with liquid cash has a better chance at the negotiating table. If you are planning to take a loan for property purchase, arm yourself with an in-principle approval from a lender.
There’s another compelling reason to buy property now. Interest rates have come down significantly in the past one year. Some banks are charging a rate as low as 6.8 percent, which is possibly the lowest in living memory. If you factor in the tax breaks on the interest, the effective cost of capital is even lower. Under section 24 of the Income Tax Act, Home loan interest (for a self-occupied unit) is eligible for deduction up to a maximum of Rs 2 lakh. Similarly, interest on loan for commercial property purchase is deductable as a normal business expense. Obviously, resulting in further reduction of interest costs.
It is equally important to exercise financial prudence and not overreach yourself when you take a loan. The EMI should not crowd out other important financial goals. Ideally, the loan EMI should not exceed 40-50 percent of your net take-home income. If it is more, you might have made a purchase you may not be able to afford. Don’t factor in next year’s increment or next year’s profits when you assess your repayment capacity. Job losses, and pay cuts and the general slow-down due to Covid-19 have taught us not to make plans on the basis of future income.
The low cost of capital apart, loans have become more borrower-friendly in recent times. The new RBI rule requires lenders to link loan rates to external benchmarks. Thus, ensuring greater transparency and a much quicker transmission of interest rate changes to the borrowers.
There are obvious benefits of self-owned property compared with rented premises. One, unlike rentals that keep increasing with unrelenting regularity, loan EMIs stay largely constant. There could be a slight increase if interest rates change, but not very steep. Two, the property can be used as collateral to raise resources in future. Loans against property are far cheaper than uncollateralised borrowings. Lastly, there are several unquantifiable psychological benefits i.e. mental peace in the face of cyclical cash flows; not having to deal with landlords on a regular basis; leaving something behind for succeeding generations.
A word of caution: in this Covid-hit market, purchasing property for self use is a good idea. Speculative activity is not a good idea. The days when property doubled in value in a few years are long gone. As things stand, the economy is not in a good shape and it is impossible to predict when the economy will bounce back. Whenever it is that the economy begins to run, it could be even longer before realty feels an uptick—expect a lag. Property anyway has a long gestation period and one should invest only if one is ready to wait it out for 12-15 years. That is the minimum time property will take to generate good returns.
Fortune favours the brave, but in the current scenario we should select “Fools rush in where angels fear to tread”. The ready availability of superbly attractive deals can engender a certain hubris and I must therefore advise caution. Do go on ahead and purchase your dream home or an appropriate office space or a retail outlet, keeping in mind that you intend to use it yourself. Renting returns and value appreciation should be on the margins of your decision making matrix.
If you can make it happen, bite the bullet and acquire a ready to move in self-use property: an office, a shop, a dream home—just do it.
The writer is a managing director of MyMoneyMantra