Real Estate Transactions, May 13-19

Grantor: Reliance Fiduciary LLC Per Rep, Estate Of Marie Fly. Grantee: Leonard Edelman Trustee, Land Trust. Property: Aspen Square 404. Cost: $830,000.

Is it advisable to buy a 3BHK flat for 1 crore in Bangalore right now, or will prices come down? Why?

My view is don’t waste 1 Cr on Bangalore apartments. The prices won’t come down, that does not mean or mean you should buy. Will some one pay 8 lakhs ( in 2016) for a Maruti Alto : no? Because the value for money for that product is not acceptable. While host of other factors may be at play, this is one way to look at when considering a property purchase. If one has 4–5Cr of networth, then one can buy 1 Cr apartment (~20–25% of networth).

I live in Brigade Metropolis Apartments in Bangalore for last 2+ years. For a 3 bed room apartment , I pay 33,000 including maintenance. My rent increased over last 2 years by 5% p.a. The 3 bed room in Brigade metropolis ask price (for second sales) is 1.2 Cr. I am sure people must be settling actual transaction at a lower price than this. I don’t believe when people quote 50–60 k rent for a 1 Cr apartment, that’s a joke. Those must be the rents for 3000+ sq ft villas. I don’t believe when people say rents increase 10% p.a – this is not true for Bangalore and not true for any other city. This could be true for 1 year, but not year on year. Like quality talent, good tenants are also scarce. Owners can’t afford to evict a tenant year after year and jack rents up by 10% p.a I’ve been on rent for quite some time. The max rent p.a I experienced was 8% p.a in my third year of renewal.

Edit 1: 19 lakh property in 1999 worth 1 Cr in 2015 ~ 10.95% compounded growth. Not sure where this apartment is. I’d get a 2 Bed room apartment in Brigade Metropolis for that price. Why would I buy a 16 year old apartment for 1 Cr if Brigade gives me a 5–6 year old property for same price or even to counter this- many new properties are in the reach of that price tag: Brigade Cosmopolis. And you hear the number of real estate ads on radio these days? Every 2nd ad is a property ad. That means they are trying to change /manipulate user’s behavior and mindset. Did we ever come across ads for pure term insurance policies? Never. Companies throw money at products that can’t inherently sell by themselves. This is all imaginary world people are creating by telling you what should buy , don’t fall into that trap.

Many a times I’ve come across people getting carried away with these artificial prices or like to hear (to deal with cognitive dissonance) such ‘too good to be true’ prices : 1. If one really puts up one’s apartment for sale, the real deal they would get would be much less than what’s typically quoted 2. Huge absolute numbers can be achieved by compounding effect over long periods of time. A multi cap equity fund with ~13% compounded growth would return 1.34 Cr (out of 19 lakh) over 16 years. ~14.85% compounded return is what one needs over 5 years to double the original investment. So when things go 4 times in 10 years, the compounded return is ~14.85% p.a. I have not come across authenticated/aggregated data except sporadic data points ( my neighbor’s uncle or wife’s colleague’s father) in real estate where this is achieved.

Edit 2: some facts/close to factual information that one should consider, put in perspective while considering this buy decision. If one observes many US folks (relators/agents or home owners) strongly recommend buying a home vs renting like the way Indian folks do. However there are certain key differences between these markets.

  1. Typically in US, rent is higher than EMI (mortgage payment) supposing 20% down payment and 80% loan or rent/EMI ratio is not very far from 1. In India – rent is significantly lower than EMI, it’s almost 1/3 in India. Based on this one point alone, I believe it’s commercially okay to consider buying /owning a home in US and not in India.
  2. Take these numbers – one can argue I used numbers to prove my point, may be, I am heavily biased against buying property in India , neverthless I still believe there is some merit in you reading through these numbers. Many of my friends/family members who are home owners in US : the home value is typically not more than 2 times the gross annual salary. So in Bridgewater/NJ : a 10/10 school district, a couple I know purchased home for $500 K ( with 20% down and 80% loan), they make ~$300 K (husband and wife salaries combined) Another family purchased a home ~$275K in Texas, the husband is the sole bread winner, he makes ~$150-$175K. Let’s visit these numbers in Bangalore. What do we think the annual gross salary of a family who purchases 1 Cr property? Is it any where close to 50–60 lakhs INR? I doubt. Based on my conversations with peers, families who make 50–60 lakh per annum look to buy/are advised to buy 2–3 Cr apartments. Brokers/real estate agents advise to go for 3–4 times. People are stretching themselves to buy apartments/villas, and they need to keep stretching for many many years to service those EMIs. That’s a very tough thing to do. Our human DNA over millions and hundreds of thousands of years is not built to deal with long term planning and execution – so the net result is ‘stressed lives’. Please feel free to refute my views with your data so that everyone can learn/make informed choices
  3. I learnt- not verified- one can invest to certain degree in overseas markets/US/Europe etc. If one can manage other transaction costs (not suitable for all of us) , buying a property for $300–$400K in US makes more economical sense than buying a property for the same price in Bangalore.

 

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