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The big question for real estate investors: To hold, or to sell property?

Ramesh Nair, JLL India  

Over the last 6-7 years, the number of investors who enter the residential real estate sector for the purpose of capital appreciation has been increasing. At the height of the investment frenzy in 2007-08, up to 70% of the buyers were investors rather than end users in key cities. Many of these investors are wondering today whether to sell or hold these properties. Some of them are cash-strapped, and the ‘million dollar’ question is – sell and cut losses or wait for a while longer hoping for some appreciation? If they choose to wait, how can they make any more investments? Would another asset class give a higher rate of return?

The extent of a real estate investor’s uncertainty depends partly on his investing perspective and objectives. If the investor has taken a long term-view and plans to hold the asset for a decade or so, there is little to worry about. Long-term investors tend prefer the buy-and-hold approach as an investment strategy, while short-term investors seek the much riskier path of buying and selling almost immediately.

Doing a reality check:

When the market was sizzling during the boom, an investor could sell his properties within a week. This is no longer the case today. The investor needs to check if the demand exceeds supply in the concerned – if there is a high degree of unsold, completed stock or significant stock under construction, then it is worth looking at selling. Also, the investor needs to evaluate if the economy, job market and population growth in the locality are and will remain healthy. Markets where homes are largely owned by investors could be more vulnerable to steep drops than areas heavy with owner-occupied homes, since investors may be more likely to sell at the first hint of market flux.

If an investor needs liquidity urgently, he should go ahead and sell. Due to the increase in interest rates over the last few months, there are no major upswings expected over the short term. However, panic selling should be avoided. If it financially feasible, it always makes sense to hold on to a property during a prolonged period of sluggish-to-negative growth. In a seller’s market, it is possible for investor to maximize their sale price. However, the country is still rife with buyer’s markets after the global financial crisis.

Want to sell now? Consider these factors first:

1. The current interest rates
2. The property’s rental potential
3. The cyclical phase during which the property was acquired
4. Monthly EMI and other outgoings such as property taxes, insurance and maintenance, and
5. The future appreciation potential on the market, driven by potential infrastructure development in the area

If you plan on moving into the property in the near future, retaining it obviously makes sense. During the boom years between 2004 and 2008, residential property capital values grew faster than their rental values. In markets where the gap in capital values has increased disproportionately against the rental values, prices may not rise significantly in the short term. Although capital values increase from time to time, leading to a proportionate rise in capital values, capital-rental values ratios eventually return to their past average. Factoring this in helps the investor get a clearer picture of what his property will be worth over the next few years.

Homeowners who occupy the property typically do not spend much more on the monthly costs of ownership than they would to rent a similar property, unless they anticipate a huge upside when they sell.

Currently, the Indian residential real estate market in many cities is defined by a cautious wait-and-watch stance. A not insignificant number of prospective home buyers are opting for short-term leases to avoid getting locked into prices they will later regret. Short-term investors in markets where the values have peaked should consider exiting. Investors should also factor in the loss of tax breaks claimed on home loan repayments as well as the impact of capital gains tax and avenues available to circumvent it. Investors should time the sale of their properties to avoid low interest seasons such as inauspicious periods or the monsoon.

To sum up:

It is unwise to sell at the current time unless there is a pressing need for liquidity or a good deal materializes. If you have indeed decided to sell, then you should go by open market valuations and not wait to achieve the Utopian and ever-elusive ‘highest price’. If you buy and hold for the long term (i.e., for more than 10 years), you are not likely to lose in any case. History has shown us that real estate values generally go up in the long run, with few exceptions.

The writer, Ramesh Nair, is Managing Director, West India, Jones Lang LaSalle India. To read more by him and other real estate experts, visit http://www.joneslanglasalleblog.com/realestatecompass/

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