Real Estate: Should I buy Land or should I buy an apartment
Real Estate: Should I buy Land or should I buy an apartment
Real Estate is one of the most fulfilling asset class. The satisfaction buying a home can give you, nothing else can. Even if you don’t stay in that house, it’s a treasure, a place where you can go relax, a place where you can see other families stay.
But when you are looking at buying an asset, what is that you will look at, an apartment or land.
Well, let me start with a simple microeconomic principle – Supply and demand. The subprime crises in the US has created a huge supply, while expectation of further lowering of prices has kept demand lower. On the other hand, look any economy which is growing at a fierce pace, the prices there sky rocket, just contrary to the earlier case.
Now when most of us are making this decision, especially in India, we most start with the basic confusion – either to buy land or to buy a flat in an apartment. Needless to say, most of us want to have both, at some point of time in our life.
Now, lets go back to the supply-demand logic. It is very important to realize that the supply curve of land is vertical. There is no other piece of land that looks like the piece of land you are looking at. Let me draw an analogy here… “The last supper” drawn by Da Vinci in 1498 is different from “The last supper” drawn by Da Vinci in 1499(had he drawn it again in 1499). Both are unique and have a vertical supply curve. Any increase in demand will cause an exponential increase in price. Land is exactly like that.
A piece of land can be like no other; hence the seller decides the price. You will need to keep this in mind while buying and well as selling. Applying the logic, if you are buying this piece of land from a person who has a lot of such land pieces, you are in for a good deal (for the seller, this is just another plot of land he is selling). While when you sell however, you have to carefully pick the buyer and demand the price you want.
As long as you are not willing to sell, no price can get you to sell.
Lets look at apartments on the other hand. Now its very critical that you chose the location and property which is unique. If its not unique, you will never be able to demand a premium for it.
While I was buying my flat in Mumbai, I studied the real estate market in Mumbai. There are lot of large townships, away from local stations. The facilities are good, the prices same or at a slight premium. But each township has 200+ flats. Also, there is ample of land around, where you can see construction of similar apartments happening. Now look at the supply curve here. Be it rental or outright sell, there would always be supply here, making it difficult for you to get any premium.
Now let’s take a location near the local station. Here there is no land available. This means there can be very little incremental supply in this area. The apartments here are smaller, which implies lower supply within your area/building. Now suddenly, the characteristics of flat in such an area resemble that of land. Needless to say, and small increase in the demand here will lead to steep increase in price.
In summary, would like to just say that when you are taking a long term, high investment decision like property, think about all the above things. If I were you, I would either buy land or buy flat where supply curve is vertical.
Read Full Post | Make a Comment ( 3 so far )Stock Markets: Where are we headed ?
Where are we headed
Now that most of the commentators on Dalal street have been proved wrong, we all stare at the future, thinking where are we headed next.
Some say the pain “may” be over one day, the other day they say there “might” still be some more downside. How can you have a view which is in may and mights. I have been following the stock market for a few years now. The targets for specific stocks are based on pure hunch of the speaker and seem to have no logic what so ever, and that is always followed by “may/might” theory.
Anyways, analyzing the current situation, what the sectors to look at and why. I will mention only about sector I know about or have studied.
- Banking/Finance: The credit crisis has shown a spectacular uptrend in the last few months. This trend threatens to continue for a few more months as the credit criteria continue to tighten for all lenders. This trend will see a further increase in losses till we reach the peak before starting the downward journey. The credit cycle typically takes 24 months to stabilize, and we can expect things returning to normal only in the last quarter of 2009. Meanwhile, since lending will reduce, there will be lesser and lesser balance sheet by the day; hence one can expect lowering of profits because of runoffs as well. So a double whammy, lower revenues – because of lower new loans and older loans paying off and higher credit losses.
I would suggest staying away from all companies which are too focused on consumer lending.
- Real Estate: This sector has reached a level of typical saturation, ala FMCG. The prices will not see much growth, unless they are differentiated products – like a “Healthy Living” township or “Build Tomorrows leaders” township. Smaller players will have to go niche, and larger players will have to go volume. If you are invested in a vanilla small player, please exit the counter. The home prices will remain more or less stable in tier 1 cities, may be 5-10% drop in suburbs. Tier 2 and tier 3 cities will crumble up to 20%, esp since the developers here are typically local builders, who can undercut larger players with their cost efficiencies. A branded national player may just end up being a status symbol in these cities. Also, the rentals in tier 2 and tier 3 are very low, taking the regular investment return out of picture for the investor. The speculative demand will die down for lack of growth prospects.
- Commodities: Like all rallies, commodities rally is about to get over there will be a sharp correction in the prices of lot of commodities, largely because of speculator interest.
IT : Info tech stocks are a risky bet right now. The US slowdown has not yet gone into a full fledged recession yet. My guess is in the next 3 months we will see some bad news in this sector as bigger giants start looking at their spending.
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Anand's thought book 