Reports from the construction industry indicate that the cost of constructing new buildings have increased dramatically in the last one year or so.

Cost of steel has doubled in the last one year to about Rs. 60,000 a tonne. Similarly, cement prices are continuously rising and so are sand prices. Of course, labour and transport are also much more expensive. All this adds upto what is described below.

Just an year back, overall construction costs were only about Rs. 1250 per sq ft. (itself quite high compared to previous years) then it increased to Rs. 1400 per sq. ft. about six months back. Now in the last few months, it has hovered between Rs. 1650 and Rs. 1800 per sq. ft. 

Large projects can take years to complete, during which such cost increases can eliminate margins of the builders. So Credai (Confedaration of Real Estate Developers Association of India) is likely to insist on inserting escalation clauses to cover such increases in future.

Translation - buyers will have to pay for these increases in future. Trust the builders to pass on these cost to the end users, who as usual have no real say in the matter.

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With some interesting comments from our readers in the last post, thought I’ll do one more post in this series. This being primarily to identify situations where apartments are better than independent houses purely on an investment basis.

Anyone who has read part 3 & part 4 would know in which direction my views lie. But if I have learned anything in life, it is that there is an exception to every rule and a negative to every positive and vice versa and inside out and forward backward. That’s why the world works and remains interesting to us. To cut short on the philosophy front and getting to the point - not all independent houses are necessarily superior. The ‘location’ matters a tremendous amount.

If you go and buy a villa/bungalow in a village/small town thinking it is a better investment, I am sorry!! You can wait till elephants roost on trees and relatively nothing would have changed on the price front for your villa. Real estate price increases is largely centred around urban centres and will continue to be so. Only exception I know of is Kerala where land prices have increased tremendously even in villages. The reason is unique to it - NRI Keralites are treating the entire state as a retirement home.

One of the good things when you buy an apartment is that you are naturally protected against the foolishness of buying something in a remote corner of the country. The apartment builders who are sinking in their money would have ensured that the location is relatively alright and ripe for future urbanisations. And the degree to which a locality gets urbanised is what will eventually determine the future value of homes in that area. When I say urbanised, I don’t mean noisy-polluted streets; rather that it is an area of job creation so that people will immigrate to it than emigrate from it.

 So, to sum up the investment theme on homes:

If you are an average joe who doesn’t want think too much but want a good investment that is sure to appreciate, shut your eyes and buy an apartment in any of the top Indian cities. You will not regret it.

If you think you are smarter than the average guy and feel that you have what it takes to make indpendent decisions involving relatively large sums of money, buy a villa near a locality that you judge to be ripe for urbanisation. Reward is more if urbanisation happens; but if your judgement is wrong, prices can stay flat for upwards of 10 years..

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Continuing from here

Which is the better investment?

Thing with apartments is that the flat owners don’t really control the land; at least not in their individual capacity. The land disposal lies with the society of the housing complex. Typically, no new development activity is undertaken within the premises of the housing complex for several decades because of the various pulls and pressures present in the society.

Some very old chawls in Mumbai are going in for reconstruction of their area after nearly 100 years of existence! The buildings are nearly crumbling now, and I guess only that threat persuaded them to go in for the revamp. In such a scenario, the chosen builder will buy the residence at a rate higher than what it would fetch in the market and then allots similar (slightly larger) apartments in the newly constructed buildings for the old owners. But they also constuct many more apartments, which they sell to new tenants as their profit for the undertaking. This is being made possible because Mumbai has started raising their FSI for these projects on case-to-case basis.

This problem never exists for the individual house owner. S/he can dispose of the land as they deem fit at whatever time they want to.

Now the core of the problem for an apartment owner in Chennai, Bangalore etc. is this. What happens if the FSI is raised substantially by the government 4-5 years from now? It will immediately translate into more supply of apartments in the area and will result in a downward pressure on the price per sq. ft. of all flats in the area.  Even though the newer flats have a lower price because of their lower share of ownership in land, it will reduce the price of even the older flats in the area that were constructed when the FSI limit was stricter. Only way to get the true value of their land holdings would be to reconstruct the buildings of the complex; but that will prove impossible because of emotional attachments of the residents. It is a debatable question whether a new buyer of an old flat would pay more for the slighlty higher ‘imaginary ownership’ of land they get with it. I would say not.

Thus, in future I see apartments getting rigidly slotted into the ‘price per sq. ft.’ category and independent houses being sold by the more correct metric - ‘land cost + constuction cost’.  

Am not sure whether I put my arguments in a cogent enough fashion. Let me know what you guys think…

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While I was drafting the second part of the piece on apartments vs. independent houses, I happened to go through the archives of Aavaas, partly to see if there had been any relevant posts about this topic in the past. Well, what do you know, I found two separate posts made by Vivek and Karthik. Both were made last year, so please excuse me for missing them in my first post. Check out what Karthik has to say here and you can read Vivek’s views on the topic here.

So to summarise where we were yesterday, apartments are becoming popular in Indian cities despite the fact that they are not considered the best option in other parts of the world. One major reason for the increasing popularity of apartments is the difficulty of land transactions in India and its associated maintenance later on. Not to speak of the problems in constructing a brand new building in the middle of a major city.

One other aspect which is unique to India, is our extremely poor infrastrucure in terms of roads, power, water, parks, public transportation etc. In other countries where the infrastructure is relatively good, they have everything to gain by living in an independent house; but in India, our poor public infra forces those who can afford it, to live in islands of affluence - represented in today’s townships & apartment complexes.

I have just one problem with townships.  Most of them are too far away from the city. So while they solve all infra problems that are internal, they actually exacerbate the transportation issue!! And about those ads that say townships will have schools within their premises, all I can say is, they don’t have a clue what it takes to build an school. Maybe I’ll write a whole separate post on this side issue later on

All things considered, from a pure live-ability standpoint in the larger Indian cities, apartments score over independent houses for ordinary people (especially non-natives). Please read Vivek & Karthik’s posts also for more on the subject. They talk a lot more about issues like privacy &  security which are critical.

However, from an ownership perspective the ranking is reverse; an independent house being a better asset than an apartment. Will adress that in a later post.

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Check out these articles 

http://news.in.msn.com/business/article.aspx?cp-documentid=1402226,  http://business.timesonline.co.uk/tol/business/markets/india/article3810486.ece

It’s finally happening. The real estate market in India is cooling down. This is probably a breather before it snatches up its skirts and start trotting again. But nevertheless, what many people argued would never happen has happened. Prices of homes have declined not just in small isolated pockets but in large localities and across multiple cities.

The fact that this has happened at roughly the same time in different places is very interesting. According to me, it is good proof that real estate market is also a sentiment driven market like the stock market. After all, supply could not have exceeded demand in all the cities at the same time!

There is probably a bit of the FUD (fear, uncertainty and dread?) factor as well. With US real  estate market showing no signs of looking up and most experts predicting the slump to last till the end of 2009, it’s no wonder that Indian home buyer has started having second thoughts. Check this piece for the latest on the US market - http://www.bloomberg.com/apps/news?pid=20601087&sid=aS8rWyvV0osg&refer=home. Quite informative. For instance, didya know that the average US home cost is now $200,000. That’s roughly 80 lakhs. For that price we can only get a semi decent place in Mumbai !! Guess, a reality check was long due.

However, our advice to those who are yet to own a home would be - BUY it now. There is no need to wait for the magic price on things as important as this. You may never get the extra 10% discount you were wanting. With tax deductions and all, it makes sense to invest in a home for the first time.

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