The Indian real estate market is among the most lucrative for making investments. Barring grave global crises such as the most recent one, this market will not go downhill and provide very decent returns to investors.
Before the global financial crisis (GFC) or recession that hit the world in 2008, real estate investors made great profits on properties which they had held for just few months. During the recession itself, property markets plummeted and there were no takers for real estate.
However, this was an unnatural situation – as the situation improved and things came back to normal, real estate market across the world became calmer. In a normal market scenario, property rates rise at a steady pace and uneven or abrupt rises or declines do not happen.
There are two types of investors into properties – those who look at making a regular rental income and have no plans of exiting the same, and those who look for capital gains. For the latter type, earning good returns requires them to time the sale of the property well. Only when the property has seen decent price appreciation does it make sense to put it on the resale market. The question is – what is the right time to sell?
This subject is incessantly debated, and there are various opinions on it. However, it is generally agreed that in normal market conditions, the real estate market should be looked at as a long-term investment bet. What this means in real terms is that a good ‘holding period’ for properties purchased for capital appreciation is around three years, with the ideal period being 3-5 years. However, it has actually been seen that the best returns on investment on properties are actually obtained in a period between 5-7 years.
The perfect time to exit from a real estate investment will actually depend more on one’s expectations than on market conditions. While exiting after three years should ensure decent returns on investment, one would have to extend the horizon if the expectation is for the highest possible profit.
Investors looking for the highest capital gains from their property investments should target residential projects that are under construction, rather than completed projects. The best time to invest in such properties is during the time of launch. Thereafter, while some experts feel that the best time to exit such properties is when the project is nearing completion (or latest when the developer starts handing over possession to buyers); others advise investors to target one year after possession as the perfect exit time.
Which of these horizons make the most sense will really depend on local market conditions such as demand, supply and infrastructure development of the region. Before taking a decision to either buy or sell an investment property, a thorough understanding of the current local property market is in any case de rigueur.
Authored by: Anil Pharande, CMD – Pharande Spaces