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Why should we invtest in real estate in Gurgaon


Residential real estate market is currently in a correction phase, which began three years ago, and according to experts, will last for a few more quarters.

Buying real estate is widely considered a safe bet by Indian investors, even though the market might show otherwise. Like every other market, real estate too has its highs and lows. For instance, the real estate market boomed between 1988 and 1994, and most property prices went up by over 10 times during this period. However, the bear market that followed was very challenging. By 2002, many properties were being put on the market at half the peak price they achieved in 1994. If one considers the high rate of inflation during the 1994 to 2002 period, the actual correction during the bear market was more than 75 per cent. A similar trend seems to be playing out now. Investors minted money in residential real estate during the boom that occurred between 2002 and 2013, with prices going up by 6-10 times in several pockets. However, experts caution against expecting similar returns in the future, because the maximum appreciation happened in some nascent markets like Gurgaon. "It was as an aberration, reflecting the times and the fact that markets were in a very nascent stage. It is not fair to expect that kind of appreciation in developed markets," says Amit Oberoi, National Director, Knowledge Systems, Colliers International (India). 

All speculative markets move in cycles, and the real estate market in no exception. As is evident, the boom in the residential real estate market is over. It is currently in a correction phase, which began three years ago, and according to experts, will last for a few more quarters. 

Is this the right time to invest in real estate?

Lack of buyer interest 
The market has witnessed a marked decline in the number of people buying residential properties. One of the main reasons for this is the fact that property prices remain high compared to the average income of individuals. "There is end user interest, but what buyers are waiting for is reasonable and affordable prices," says Sunil Sharma, CIO, Sanctum Wealth Management. "As of now, end users are only looking at projects that are priced appropriately," he adds. 

Since the real estate prices vary significantly across cities, the concept of affordability also needs to be analysed at the city level. Affordability is also affected by interest rates and increase in income. Fall in housing loan interest reduces the EMI and increases affordability. Although the RBI has cut benchmark rates significantly in the recent past, its transmission was much smaller. For example, home loan rates came down only by 50-75 bps compared to 125 bps cut by the RBI, which did not result in any significant pickup in demand. The rise in income over time also failed to keep pace with the significant jump in real estate prices that occurred between 2002 and 2013. 

Rental yield, which is the amount of rent paid per annum over the cost of buying a property, is another factor that determines the level of demand, for both end users and investors. If the rent is higher than the EMI to be paid for purchasing a property in a given area, people are more likely to choose buying their own home over living in a rented property. This means that the end user demand will go up if the rental yields are high. Similarly, the return for investors who buy houses to rent out also go up and this will increase the investment demand. However, rent didn't increase in tandem with the jump in capital values either, and as a result, the rental yield has dropped to a significant low, ranging from 2-4 per cent compared the housing loan interest rate of around 9.5 per cent.