Real Estate Prices set to get Real!
Sep 17, 2009

Author: PersonalFN Content & Research Team

Investing in real estate is a dream of every individual. It involves substantial long-term commitment of funds. Moreover, it's a crucial but complex task of making the right decision. Post sub prime mortgage crisis in US, (the tremors of which were felt in India) there is a strong need for regulation in the real estate market.

US Sub prime tremor felt in BSE Realty Stocks

(Base: 100)
(Source: Crisil Fund Analyzer)
Note: Realty Index is an indicator of share prices of realty companies
and not the price in physical real estate market

Erratic and unregulated price movements have always been characteristic of the real estate market. In the recent past, despite the fact that real estate prices had corrected approximately by 30% (in the economic downturn); the deals cracked in the market have been clinching new highs. The highest price stands at Rs 97,842 per sq. ft. for a flat in NCPA Apartments (South Mumbai), in the city of dreams - Mumbai.

Post correction, the prices have moved northward by approximately 10-15% in the real estate market. With the introduction of the mid-income housing (range of Rs. 20-40 lakhs), the buying interest is building up from the investors and end-users.

Many investor's just settle down for a real estate rate offered to them simply because of their desperation and fascination for buying real estate. Also, many a times, investor gets carried away by the illusion created by the builders and that of their own. They don't investigate much in the nitty-gritty of the real estate deal before finalising their purchase.

This complex task of making the right decision in real estate market and judging the pros and cons is set to get simple and transparent this winter, with the acceptance of the bill for real estate regulation. The final draft of this bill is likely to be ready by the winter session of the parliament.

The bill on real estate regulation will pioneer a ranking system for the builders and the developers to rate their projects.

We have analyzed how the regulation of the real estate market can help you, investors, in making an informed decision before buying your dream house.

The impact of the bill

1) Infuse transparency in builders and developers operations

2) Promote ethical business practices in product development and delivery

3) Rating system will help investors in making an informed decision. The rating system can help the investors to analyze the following fundamentals:

These drivers will form the basis of price rationalisation in the real estate market

4) Disclosure on the title of land on which the project is constructed

5) Real estate brokers would be required to obtain licenses - then the investors will deal with registered real estate brokers

6) Eventual creation of micro-finance institutions for the investors

a) Turnover

b) Liquidity

c) Profitability

d) Scale of operations

e) Past performance

f) Management

What should an Investor do?
Like any other investment exercise, investment in real estate should also be made in line with ones asset allocation.

Given, the bill on regulating the real estate markets is still in a draft stage and is yet to be passed in the parliament, we would like to reserve our view till the time it comes in force.