By Omang Khurana December 1, 2020 In Uncategorized

IS PROPERTY INVESTMENT IN INDIA THE CORRECT WAY TO GO IN 2021?

Following on from our previous blog on How much return is ideal? we had understood that annualized returns on any form of investment must be beating the inflation of the respective years of the investment exposure. Ex. If inflation is @7%, then minimum appreciation that year to maintain the purchasing power of your money will also be 7%.

With this fact, we also concluded the bank fixed deposits offering interest @6% p.a. are not beneficial long term investments. However, bank fixed deposits should also be maintained to satisfy the short term liquidity needs.

Let’s analyze property as an investment in the long term (minimum 3 years) and see if investment in Indian residential property turns out to be a fruitful investment or not.

PARAMETERANSWER IN PROPERTY INVESTMENT
LiquidityNot a liquid asset (Cannot be liquidated overnight in emergency, unlike tradable investments)
Purchase ValueUsually High (Also varies widely with location and whether residential or commercial)
Loans are offered @6.7% to @13%
Inflation AdjustedDepends on absolute returns in long term only and dependent on the location of the property
DiversificationYes (It has low correlation with asset classes like equities or bonds)
Regular incomeYes, if rented out (If not rented out, property is considered as a dead asset due to lack of liquidity)
Annual Capital Appreciation Rate1.5% to 3% p.a. (Over past 3 years- Metro cities residential average)
6% to 10% p.a. (Over past 3 years- Metro cities commercial average)
Rental Yield1.5% to 2% (In the past 3 years- Metro cities residential average)
7% to 9% (In the past 3 years- Metro cities residential average)
Tax Deduction at Source on rental income (Deducted by the rent payer at the time of payment to landlord)Individual/ HUF (not liable for tax audit) – 5% of rent paid in cases if monthly rent exceeds INR 50,000.
Plants, equipment or machinery- 2% of the rent payable
Land, building (including factories) – 10% of the rent payable

Standard deduction on amount received by the landlord is 30% of the amount received in hand.
*References for the statements made are available in the hyperlinks in blue text

If we apply the above analysis assuming a property has been held for minimum 3 years, we can conclude the following:

  1. Capital Appreciation Rates for residential properties, are lower than the inflation rates. Commercial properties may or may not beat the annual inflation rates.
  2. Return on Investment (time period):
    • Residential: At 2% rental yield and 3% p.a. capital appreciation, it can take 35 to 40 years to recover the cost of initial investment.
    • Commercial: At 9% rental yield and 10% p.a. capital appreciation, it can take around 8 to 10 years to recover the cost of initial investment.
  3. The purchase value of commercial properties is relatively higher than residential properties.
  4. India ranked 47th out of 56 countries in terms of residential real estate appreciation rate.
  5. High rate of interest of loans sometimes make the EMI higher than the monthly rent. This is a wealth drainer.

Based on the above conclusions, we can conclude that commercial properties are better investments than residential properties. However, if the investor is looking for liquidity in investments, property as an asset class may not the ways to go.

However, being invested only in properties or not being invested in properties at all, are not the solution. Thus, a perfect blend of various investment instrument is required for optimal growth.

To book a complimentary meeting with a Wealth Consultant (Chartered Wealth Manager) go to WealthOK.in and book an appointment.

One Comment

  • Rakesh Kapoor December 10, 2020

    Insightful blog. I needed this to plan my child’s education in the US. Looks like timing reselling of the property when the time comes would not be a good idea. Can you let me know if I invest 1 crore in a property today to plan my son’s education in 9 years time, will it be enough? I want to send him after 12th.

    Reply

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