Real Estate Investment


Anything might lose its value, anything might depreciate, even gold might lose its colour and value but land will never cease to be in demand, for, land is scarce. The area of total land cannot be increased but its utility only can be changed. Hence land had always been in high demand and since the beginning of civilization, we have only seen hike in land rates. Thus land as an investment alternative is always the best in terms of increase in investment value.

The implications in real estate investment are not simply financial; it has social, geographical and political implications also. As investment in land is a life time opportunity people make it more as a measure of settlement. Many people do not appreciate strangers acquiring land in their area because the number of outsiders increase their authority in social matters also increase. So also their political power increases. Thus there are Laws in certain parts of tribal areas in Andhra Pradesh, Assam, Uttaranchal, Jammu and Kashmir etc where outsiders are not permitted to acquire lands. FERA (Foreign Exchange Regulation Act) did not allow non residents to invest in real estate in India. Some investments in immovable properties in India were allowed by the Reserve Bank of India on prior approval subject to certain conditions. With such regulations and restrictions in place the real estate prices, though high were at least affordable.

The Government policy of encouraging housing has started a period of boom in the real estate investment. Those who had bought flats and sites for throw-away prices in the Fifties and Sixties are now reaping large profits. For example people who bought a two bed room flat in a middle class colony from the Delhi Development Authority at Rs 50000 in the seventies are now selling the same flat at Rs 5000000. The increase in terms of value is 100 times. Viewing in terms of the profit yield, the investment has resulted in a gain of 4950000 over a period of 30 years. That means the person has earned a gain of 165000 per year which gives a 330% return on investment before tax. The tax on capital gain in India is only 20% of the net capital gain after indexation. In the present case the total tax payable would be 896200 plus surcharge and education cess. Even after all these charges, the percentage of return on investment would be 262.31 per year. This is over and above the benefit of enjoying the property either by living in it or by letting it out. In case of commercial properties and agricultural lands the margin of profit is much higher. The various amendments in the Wealth Tax Act, introduction of the new and simpler FEMA, and establishment of Special Economic Zones for which large extents of land are being acquired- all these factors have contributed to extraordinary hike in land rates.

The fast pace of Urbanization also is one cause for increase in Real Estate values. There is mushroom growth of real estate builders and developers who are throwing in large amounts of money for acquisition of pieces of land to cater in return to the middle class investor.

There are certain disadvantages also attached to investment in Real Estate.

First and foremost and most injurious is establishment of ownership. People acquire right of ownership in many ways like purchase, gift, inheritance, government allotment, exgratia etc. In all these cases, the title passes on to the buyer only if the seller has a clear title. Many times, the documents do not reveal a clear title. A government allotment or exgratia is easy to establish, but in all other cases, establishing the title of the seller is a tricky issue.

Further there have been many instances where a piece of land of housing site was sold to more than one person by a seller. Such frauds are difficult to detect from a mere reading of the document. Unfortunately there is no other way of finding out also. Another important problem is encroachment. A vacant site could be easily encroached upon or illegally occupied by miscreants and the land lords find it very difficult to evict them.

Same is the problem with houses. There were many instances where tenants have not vacated houses in expectation of consideration and the laws of the land many times favour such defaulters. Protected litigation and resultant expenses leave the owner wishing that he had never bought a house at all.

Be that as it may, the extraordinary profit that the real estate yields is a major attraction for prospective investors. For the last three years Indian Real Estate Sector is witnessing a never-before-seen boom and it is hoped that the upward trend would continue.