Investing in Bangalore real estate - pessimistic view ...

I covered the optimistic view in the last post - had to give good news before giving the bad news! Now it is time for the pessimistic view.
Why both optimistic and pessimistic views?  That is the nature of the beast! The old saying of 'risk versus reward' can't go wrong and this is definitely a 'time will tell' type of story.

As a R2I hopeful, you might be quite familiar with what happened in the Western world in the real estate scenario in the last few years - lets revisit that a bit. There was so much hype that even office cleaners bought homes(not a made up one, this is a real story and I have seen this) - since homes can be bought literally for 'free' - loans were available with no down payment and pretty much 0% interest. No background checks were done for income or eligibility. Needless to say, all of got foreclosed when their 'free' term ended and they couldn't afford to even do the interest payments. Now, that was greed working its way and taught some tough lessons that 'nothing is free'.

So, what is the take away for Bangalore real estate from this story? There are few for sure and this is where the pessimistic view comes into picture. Let me list few downside points and leave you to think about those...

• There is a huge demand for apartments in Bangalore and there is no statistics to show how much of these are investment properties versus how many of these are bought for occupation. There is a good demand for rental housing as of now and is expected to stay but at the current rate of new building, there could be an oversupply when constructions are completed - needless to say there are so many new mega size projects which are in-progress as of now.
• Adding to this factor is that - there is very minimal control on how much can be built. Many of the apartment complexes are very large and can house anywhere from 300 to 1000 families. BBMP, one of the worst run entity is not worried about any of the factors like road infrastructure, water - anything is possible by 'you know what' and 'you know who' factors. It is the golden time for real estate in Bangalore and so many things can be developed in-terms of infrastructure with the taxes that are pouring in but unfortunately the funds are pouring in to leaking pots! That can spell doom to the real estate future of Bangalore.
• Infrastructure: As I said above, the density of occupation is not measured against available infrastructure and building happens without any regard to such factors. You would be surprised to see  that for a apartment of the size of 300-500 families, there would be 5-6 visitor parking slots! That is the kind of planning and approvals that go along with these buildings. The approach roads are so small  hardly one car can pass thru' but that is not a factor when building permissions are given.
• Water availability: You might already be aware of the 'Kaveri' war! Unfortunately, there isn't sufficient natural water supply closer to Bangalore. With the indescriminate digging of borewells, there is more water extraction than preservation. Rain water harvesting is a must for new development but nobody checks whether they are really maintained after homes are built. As one saying goes 'water scarcity has made cities to vanish'. Water scarcity can impact Bangalore real estate scene in a major way. Unfortunately, our politicians are busy holding on to their seats and filling up their pockets than any of these real issues.
• Tech industry dependence: Unlike other cities, the apartments and high end real estate is driven only by tech sector in Bangalore. We do see other industries like pharma etc coming in but at much slower rate. If the cost keeps going up and it is not economical anymore for multi nationals to come here, that could impact this sector in major way as well.

Anyway, these are my opinions - pls feel free to sound off your thoughts ...

Investing in Bangalore real estate - optimistic view ...

As I mentioned in my previous post, let me cover the optimistic view of investing in Bangalore real estate. Unfortunately, like any thing else, risk and rewards go hand-in-hand here as well. If somebody says 'investing in real estate in Bangalore/India is the sure bet to get handsome returns', don't trust that! The old truth of 'risk versus rewards' always wins. However, in the current environment, Bangalore real estate does look in the upward trend and what future holds is a 'time will tell' story...

Many factors contribute to this:

• Tech sector is definitely driving the housing market. Banks are still generously giving home loans and it is very easy to get funds to invest in an apartment unit. Crossing loan amounts of above 60-70 lakhs becomes a challenge even for the tech folks but even at this level, it is still possible to settle on something.
• Availability of high-tech workers: It would be hard to find anywhere else in India the amount of tech savvy people like in Bangalore. This naturally attracts more tech companies to have Bangalore as the location, which in-turn drives the real estate market.
• There is still a good influx of people from all parts of the country to Bangalore(not only in tech sector but other peripheral sectors like hotels, construction etc) and that will keep the demand at higher level. The fact that it is difficult to get a good apartment unit in a decent location shows that there is still demand for apartment units. This is typical in larger communities where there are good facilities like swimming pool, club house, good walking area, gym etc.
• Bangalore tops in getting access to malls, entertainment, good Indian/international food etc. This does attract lots of folks to stay in Bangalore.
• Whether is a major factor - it is comfortable throughout the year, which is hard to beat even when compared to any part of US.
• There is still lots of international investment that is happening into Bangalore - not only in the tech sector but in other sectors like hotels, malls, hospitals etc. As far as new tech companies starting offshore setups, that is a TBD. However, I have seen many, many startups, which are setting up offices in Bangalore, which is a good sign for real estate as well.

I have seen places like Sarjapur, which are really outside of Bangalore and not at a commuting distance for work to high tech areas getting sold out when it comes to Villa/apartment projects. Unfortunately, nobody knows whether these are getting bought for investment and with a view of appreciation or they are folks really who are going to stay here when homes are ready. If you are from California, you might remember the story of city Stockton!

Overall, if you count the factors above, it seems like good times are there to stay for some time. If you buy the right property at the right location, you can still get good returns. However, to note, buying a finished apartment and keeping it for few years with a view to sell down the line won't get you much - they may go up a bit but start loosing value as the apartments start getting older. Will cover such scenarios in my next post ...

Bangalore real estate - should I invest for R2I ?

Looking at the traffic to the related posts, I can see that there is definitely lots of interest in the topic of real estate in Bangalore. This is very relevant if you are doing R2I to Bangalore as well. Hence, let me try to  add my 2 cents, with R2I as the focus ...

As a possible R2I, you have few choices:

• Buy an already built apartment
• Buy an upcoming apartment, which is not yet built.
• Buy a site and construct.
• Buy an already built home.

All of these have their own +ve and -ve sides.

Option #1 Buy an already built apartment: This is going to be bit of an expensive proposition. Once completed, price of such apartment goes up - it could be Rs. 3000 or so during initial launch and it could go up to Rs. 4000 or so once completed. However, you are avoiding the risk that builder may run into some legal issue and may not complete or delay. Also, in the already built apartment, many things are already established like swimming pool, STP etc.

Option #2 Buy in an upcoming apartment, which is not yet built: If you have strong R2I feeling or sure about it, this is the best option - if you plan to move to an apartment setting. Prices are lower and you can save anywhere from 10 lakhs to 30 lakhs. There is risk that builder may run into legal issues or may simply delay the handover. Also, if your job location is not fixed, this may become a challenge (whereas in the option #1, you can buy close to your work place). Note that builders take anywhere from 2 to 3 years to complete once they launch. Apartment communities do provide much more social exposure to you and kids but the space you get is much more limited. The problems of noise from neighbors(like in US apartments) is not there since walls are concrete. Also, noise from upper floors are relatively less (you definitely don't hear toilet flush on your head!).

Option #3 Buy a site and construct: This could work very well, given 2 constraints - a)you have some time to come over to India, look for a site, do all of the paper work b)willing to wait for few years before you can occupy. Remember - getting a good site in a good location with clean paper work is NOT easy. Also, getting a house constructed along with your work schedules is no joke. I haven't yet seen a single house owner who said he/she was able to get it done in-time. All of the advice we have gotten so far is to avoid this if you can. However, here you get the option to build your home the way you want. If you construct an independent house outside of a gated community, you need to worry about the security as well.

Option #4 Buy an already built home: This is still an good option. Normally, already built houses don't carry so much value. It is the land price that matters more. However, don't at all be surprised to see a price tag of anywhere from 2 to 5 crores (yes, that is crores for you!!!) in gated communities in high-tech areas like whitefield. You can get older houses within 1.5 crores or so (more like 2500-3000 sq ft area) in decent areas but search is going to be bit longer.

Looking from the investment perspective, I don't see any indication of the prices going down any time soon. Instead all indications are that they are heading upwards. In general, the land gets more appreciation and you can safely sell and invest somewhere else on R2I (say, you need to stay in a different location). So, if you have concrete R2I plans, planning ahead using one of the options could save you some $$$!

I will cover the optimistic and pessimistic parts of buying real estate in Bangalore in my next post ...