Most of my friends/colleagues etc. are planning to buy houses and have great insights about the market rates prevailing in various cities. Most accepted way to evaluate a house , is to see the location , calculate the approximate prevailing per square feet rate and multiply it with the built up area of the apartment. A classic example of relative valuation. Just like we valuate stocks by using various rations like P/E , P/S , EV/EBITDA or during the dot com bubble days P/No. of Monthly Clicks etc. However , is there any alternative to relative valuation of properties as there could be a chance that aggressive marketing may artificially jack up the relative rates.
For example, one fine evening in a long weekend, I was browsing through the Sulekha.com website. I was amazed to see how many large so called Mega City Projects are happening right now with great world class facilities like Gyms, Swimming Pools, Jacuzzi , Community Centers etc. But , will an average resident utilize all those facilities in the long run, remains a big question. For example, a community center is good to have , but probably a user would need it twice or thrice in a decade may be ! Similarly , I have seen in most complexes, swimming pools are left unattended and unused by its residents. They would rather prefer visiting a professionaly managed pool for both hygiene and other factors....Hence, its very important to do the investigations on ground realities before arriving at a price.
Another way probably to arrive at a price is the expected rent a person can get from the apartment and then do a perpetuity analysis to find the final value of the apartment.
For example, suppose a flat may get an annual rent of INR 120,000 in ist year which grows at 10% every year. The person would place his monthly rent income in an SIP , which probably gives him an annual return of 17%.
Hence, by applying simple DCF over perpetuity , the value that this person will put for the flat should be :
120,000/(.17-.10) = INR 17,142,86.
Now, doing a market study , the flats that can get INR 1,20,000 rent per year , are being priced at around INR 30,000,00 approx. So their is a clear over-pricing the guy may feel of around INR 13,00,000.
However, the situation might be totally different for another person , who places his rental incomes in a FD that approximately gives him 10% return and he expects his rents to rise by 7% annualy. His perceived value for the same flat would be : 120,000/(.10-.07) = INR 40 ,000,00. Thus , if he gets the flat at INR 30,000,00 , he thinks , he is gaining INR 10,000,00 !!!!!!!
Thus the price of a flat will vary from person to person by this method. Apart from this thing he will also evaluate his need for other facilities like swimming pool, proximity to office , neighbor hood etc etc. plus the amenities that I had mentioned before.
In a nutshell, arriving at the right value for a real estate requires a lot of research since it may involve paying EMIs for quite some time. A market research of 2-3 months is advisable before commiting to buy a flat is what I would recommend.
For example, one fine evening in a long weekend, I was browsing through the Sulekha.com website. I was amazed to see how many large so called Mega City Projects are happening right now with great world class facilities like Gyms, Swimming Pools, Jacuzzi , Community Centers etc. But , will an average resident utilize all those facilities in the long run, remains a big question. For example, a community center is good to have , but probably a user would need it twice or thrice in a decade may be ! Similarly , I have seen in most complexes, swimming pools are left unattended and unused by its residents. They would rather prefer visiting a professionaly managed pool for both hygiene and other factors....Hence, its very important to do the investigations on ground realities before arriving at a price.
Another way probably to arrive at a price is the expected rent a person can get from the apartment and then do a perpetuity analysis to find the final value of the apartment.
For example, suppose a flat may get an annual rent of INR 120,000 in ist year which grows at 10% every year. The person would place his monthly rent income in an SIP , which probably gives him an annual return of 17%.
Hence, by applying simple DCF over perpetuity , the value that this person will put for the flat should be :
120,000/(.17-.10) = INR 17,142,86.
Now, doing a market study , the flats that can get INR 1,20,000 rent per year , are being priced at around INR 30,000,00 approx. So their is a clear over-pricing the guy may feel of around INR 13,00,000.
However, the situation might be totally different for another person , who places his rental incomes in a FD that approximately gives him 10% return and he expects his rents to rise by 7% annualy. His perceived value for the same flat would be : 120,000/(.10-.07) = INR 40 ,000,00. Thus , if he gets the flat at INR 30,000,00 , he thinks , he is gaining INR 10,000,00 !!!!!!!
Thus the price of a flat will vary from person to person by this method. Apart from this thing he will also evaluate his need for other facilities like swimming pool, proximity to office , neighbor hood etc etc. plus the amenities that I had mentioned before.
In a nutshell, arriving at the right value for a real estate requires a lot of research since it may involve paying EMIs for quite some time. A market research of 2-3 months is advisable before commiting to buy a flat is what I would recommend.
No comments:
Post a Comment