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Nov 27, 2013, 02.42 PM IST | Source: Moneycontrol.com

Real estate is a high risk investment

Every investment avenue can be evaluated on the basis of risk and reward attached to it. If there is high reward in any asset class then there is inbuilt high risk attached to it and if the reward is low then the asset class can be considered as a low risk investment.

Pankaaj Maalde

Campa Cola society in Worli, Mumbai has raised many questions about the inside reality of real estate sector in India. It has highlighted the nexus between politicians, builders and bureaucrats. It has also highlighted the urgency of regulation to safeguard interest of common people and investment risks in a real estate as an asset class. In this article I will focus on investment in real estate as an asset class. In India most of the people consider the real estate investment particularly in residential premises as safe investment with potential of high reward which may not hold true now. The reason why people bet more on this sector is availability of easy loans in recent times and tax benefits available on such home loans. Another major reason is involvement of black money which makes this sector more attractive for those who generate black money and avoid tax payments. It is true that investment in residential premises has given good returns across India in last decade barring the short period of 2008. But, whether will it continue to move northward forever at the same speed? The answer is definitely “NO” as it is also an asset class which also runs through cycles. There are three major risks involved in any investment avenue namely default risk, market and interest rate risk and reinvestment risk but in real estate the risk of illegal activities and regulation violation is major risk with potentials to wipe out your entire investment.

Every investment avenue can be evaluated on the basis of risk and reward attached to it. If there is high reward in any asset class then there is inbuilt high risk attached to it and if the reward is low then the asset class can be considered as a low risk investment. Investments in real estate undoubtedly come under high-risk and high-return category. Nobody in this earth can defy this economic principle of close positive co-relation between risk and reward. Expecting high-return without looking at high-risks involved can spoil your entire financial life. The investment required in real estate is also too high and if your calculations go wrong, you may have to compromise on your other major financial goals.

As I mentioned above that in real estate sector in addition to the market risk, there is huge risk of regulation violation which makes it even more risky.  This cannot be easily found out by a lay investor and comes up only in major incidence like Campa Cola issue. Risk also comes from not knowing about the risk involved in the asset class. Very few of us know that builders and developers have to take as many as 150 approvals from different local and state authorities before starting any construction activity. The permission is required to be obtained ranges from local municipal authorities, state authorities to fire brigade. There is no way that a common person can find out whether particular builder has obtained all the required permissions before starting construction. A common man is comfortable booking or buying a flat when he trusts some builder on the basis of past history or construction of building is complete without any break. A common man is more concerned about the vacant possession of the flat and once the key is handed over to him he feels that everything is in order. He feels even more assured when the electric supply and water supply is given to the building and after that he never bothers to enquire about whether the builder has got Occupancy Certificate or not. Even today there are thousands of building in city like Mumbai where the OC is not given for many years and still lakhs of people stay in these buildings without realising the risk. Even they know the risk, it’s difficult for them to book builder for this due to his connections. 

Campa Cola is just a one incident and can be an eye opener for all of us though even for most of them it is not investment. The major lesson is that nothing happens to builders and bureaucrats as they are shielded by political leaders. It is the poor occupants who suffer as they are ignorant about the legal issues and do not have means to find out the issues in the real estate. It is a hard reality that large chunk of politicians are actively involved in this business as the profit margin is too high. The builders also get associated with political class to bypass the procedures. The cost of legal fight is also too high and it takes years to get the justice even if one is able to get it after spending lakhs of rupees. There are many issues related to construction of buildings on reserved plots, agricultural land and forest land. Building gets constructed; people stay there for years enjoying all civic amenities and after many years legal issues come up.

It is high time that responsibilities are fixed for such illegal constructions. Municipal Authorities should not allow illegal constructions to happen and there should be minimum guideline available to public at large that what they should look before buying any property and have to make mandatory that this should be available to public on demand with all the builders. Municipal authorities also try to put all the details in public domain via websites etc. and try to educate people  It’s also high time that Government appoints real estate regulator and regulate the entire real estate market to protect the common man. It is also important for investors to look into these issues before jump in to buy the real estate assuming high returns. If you are buying it for self use, you should be extra cautious. It is advisable to appoint an advocate and take legal help before finalising any real estate deal as it involves big monies. A small mistake or hurry can spoil your entire financial life and you have to live measurable life for no fault of yours. The time has come to take informed decision to safe guard your own interest.

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