The market price of property in India is not always in sync with its intrinsic value. The home buying experience of Rajesh Kalra, a professional in Mohali, soured at the time of possession. He had negotiated with the builder and till that point of time believed that with his negotiation skills he made a good bargain for the same. But once in the house he got to know through the neighbour next door that the other person bought at around INR 4 lakh lesser price.
The story is all the more esoteric in the secondary property market. Take the experience of Sangeeta Waldron, an NRI, when she sold her apartment in Hyderabad. She was assured by the property agent that he had negotiated a giant killing deal for her. She was later told by the friends that she was short changed in the deal.
In both the deals, the buyer and the seller have the feeling of being cheated. Then there are instances of over-valuation of property. Like any other home buyer, Aman Ghai also believed that he had made the best possible deal with the builder when he bought his Gurugram apartment at the price of INR 1.25 crores. After all, he had negotiated hard to accommodate a number of add-ons in the deal before handing over the booking amount. The developer too had reassured him that since the buyer was coming through a trusted network he was given the best possible deal.
However, in the wake of falling interest rates, when Aman wanted to make the best of it and went to another bank to switch the loan at the offered lower rate, he had the shock of the life. The bank categorically told him that his loan of INR 1 crore cannot be processed since the valuation of the property in bank’s LTV (Loan to Value) assessment was only 1 crore and 100% finance was not possible.
There are many such cases emerging today for two reasons: either the given bank doesn’t value that property like the other bank, or has downrated the valuations due to secondary market lower trade-offs.
Such sour experiences are not uncommon in a property market like India which is seen in the collective consciousness as the most non-transparent and fly-by-night market. In. most of the matured property markets of the world, there are professional valuers to assess the right property valuation. These property valuers neither represent the buyer or the seller and hence their reports are believed to be credible.
What drives property pricing now?
Stage of construction
Builders’ ability to hold inventory
Cartelization in a given property market
Brokers wrong assumption derive demand
Buyers’ FOMO (Fear of Missing Out) Sentiment
Sales strategy and hype in the neighbourhood
A uniform & standardised valuation metrics that could be the benchmark of the pricing index; something that could be trusted by both the buyers and the sellers. Industry experts and the economic researchers believe that real estate valuation should be the methodical financial value of property and not just based on what price the buyer is ready or manipulated to pay.
The prices tend to differ in the same micro market, depending upon the project and the builder; and even the same housing society has price variations, depending upon the view, floor, desperation of buyer or seller, and many such other considerations. The reputation of the builder, both in primary & secondary markets, also determine the pricing index of the given property.
In India, there is no clear answer as to what determines the property pricing. It could be the stage of construction; builders’ ability to hold; market induced FOMO (Fear of Missing Out); or simply who is more desperate – buyer or the seller. It could also be the sales strategy of the builder. So, property valuation in India is subject to a number of misplaced assumptions.
In certain markets there is cartelisation of the builders that they won’t sell below the given price point. So, this imbroglio demands a systematic valuation of the property market, where the valuer is non-partisan. It is unlike the brokers who have the dual representation. The pricing index has to be backed by the economic tools and not the sentiments. Demand & supply dynamics, of course, is a critical criterion. Then the age of the property, its condition, and the competitive edge of the property should define the valuation. Another key aspect is its rental return potential and its future resale value.
How property valuation metrics would help?
Independent valuer representing neither buyer nor seller
Applied economic tools to derive value as against prevailing price index
Demand & supply dynamics of the market
Age, condition & competitive edge of the property
Rental and future resale value of the property
Location profile & neighbourhood social profile
Physical, Social & Economic Infrastructure
Reputation of builder in primary & secondary market
Construction quality, amenities & post possession maintenance
Everyone agrees that the property valuation is going to help the home buyers? Will it also help the builders in any way? Of course! It will. The property valuation in its true essence will minimise the builder-buyer disagreements & suspicion that often ends up in the court of law.
The caveat here is that valuation must be a strictly regulated profession and accountable to the financial institutions. The valuation results must be based on methods that comply with valuation standards, market research and comparable transactions. A certified valuer must be held personally responsible in the case of any reported conflict of interest.
In theory, everyone agrees that there is an urgent need of methodical property valuation in India. But in reality, there are so many vested interests who tacitly act as the road blockers. The under-writers, builders, seasoned investors et al want the pricing index to be controlled by their own cartel.
A property valuation would empower the home buyers in making an informed choice after understanding the intrinsic value of the property and not the price one is asking and/or giving. In such cases, the market manipulation of the vested interests would be difficult.
In a nutshell, the property is not as liquid and price transparent as the stock market, mutual funds or the gold, an absence of valuation metrics is challenging for both the buyer as well as the seller. In the absence of a scientific property valuation all stakeholders can at best guestimate the short-term and long-term trade returns as well as its rental value. And the transactions would continue on the basis of the desperation level of the buyer or the seller.
Ravi Sinha
#RaviTrack2Media
Ravi Sinha is a journalist with over two decades of cross-discipline media exposure. He is the CEO of real estate thinktank group Track2Realty. He has been writing extensively on the real estate sector for more than a decade now. Evaluation of real estate brand performance is his core domain expertise and he has immense insight into consumers’ psychograph. He has conceptualised Track2Realty BrandXReport as India’s 1st & only objective & non-paid brand rating journal that is industry-accepted benchmark of brand equity & ranking of the Indian real estate companies.
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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