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Invest rather than speculate
Source : The Hindu Property Plus Published On : 2009-01-17 City : Thiruvandrum

While the real estate sector has traditionally been an investor’s domain with the finite nature of land yielding sure as well as hefty returns, lately, this segment has seen the entry of speculators in a major way. This has especially been the case after the opening up of the economy in the Nineties to global players.

With multinational companies entering the fray on a major scale and the Indian IT industry earning worldwide recognition for its quality and expertise, major metros as well tier-I and -II cities started seeing unprecedented growth. There was increased economic activity and high income, with double income widely becoming the norm.

The expected offshoot of this was a meteoric increase in demand for housing, especially high-end development projects that promised a luxurious lifestyle with state-of-the-art facilities. It soon transpired that investing in such projects would yield high returns with the investments comparatively more secure than stocks.

A scenario such as this brought in not only genuine investors as well as end users into the market but also speculators who were on the look out for quick yet steep returns. The presence of speculators, in turn, created an artificial demand, boosting prices that were neither realistic nor sustainable.

The crash in the real estate market in the late Nineties was the clear offshoot of the significant presence of such speculators. While the present decade has seen developers lean more towards genuine investors and end users than to speculators to avoid a repeat of the late Nineties, the bullish market did not keep them completely away.

Besides, developers too found it working to their advantage as encouragement for speculation to a reasonable degree did increase the rates beyond genuine cost corrections. The result has been a similar scenario of spiraling prices unsupported by strong fundamentals such as genuine demand and realistic margins.

When the economic scene did a nose dive, the first to be hit was the real estate sector, with speculators desperate to offload their stocks. It no more paid to book units and sell at a higher rate before completion as the rates were either stable or were reduced.

While genuine demand as well as investment did take a hit because of the global scene, the level of unsold stocks would have been at more reasonable levels if the speculative content had been less.

Going forward, as the real estate sector tries to restore a certain level of stability in demand and price, it would work in the interest of both speculators as well developers if this speculative interest is translated into an investment venture where the fundamentals are clearly understood. For, a knowledge-based investment decision would take into consideration the level of genuine demand and supply, realistic price margins and fair returns.

An investment based on these parameters is bound to yield sustainable returns without fear of a market crash in the near future. Growth based on strong fundamentals and genuine investment-demand is sure to follow a steady path with, of course, a lower incidence of supernormal profits.

This calls for a change in the mindset of both speculators as well as developers who have so far given their silent approval to speculators.

Whether such a change of mindset will occur going forward is a matter to be waited and watched.

R.BALAJI     
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