When I said it in one of the podcasts that it is better to buy a Ready to Move apartment as it is never a costly proposition, as perceived by the home buyers at large. Compared to Under Construction, a Ready to Move apartment is loaded with execution assurance, peace of mind, and almost no additional financial burden. Ever since that I was flooded with very many queries to elaborate on the same.
The questions are being raised by not just the critics within the built environment of Indian real estate this time who love to hate my critical take on the sector. A number of concerned home buyers too asked me in the comment section of the podcast to delve deeper for their better understanding.
Well, let me first address the issue form the standpoint of policy level. Real estate being a capital-intensive business has been allowed to operate on a Sell & Build model. The only product and costliest product for an average Indian is being bought much before the product is even ready. The policy makers, on their part, rather tacitly promote the Sell & Build model through liberal bank lending to Under Construction properties. Right? If the Government’s idea is to promote the Under Construction properties, in the name of channelizing economy & creating jobs through real estate sector, then there should be no GST on Under Construction properties.
I am not even questioning as how real estate falls under Goods & Services. I am also not questioning as to how dual taxation is imposed on the acquisition of a basic need like a house through GST and then Stamp Duty. All that I am saying is that if real estate attracts GST then why on Under Construction and not Ready to Move. If real estate projects fall under Goods & Services during the construction lifecycle then how come it changes when the project is ready?
Issues that need to be looked at is:
What is the incentive of buying an Under Construction apartment?
Why shouldn’t one buy a Ready to Move apartment?
What are the costs & other implications of buying an Under Construction property vis-à-vis a Ready to Move property?
And it is here that the poor home buyers have been brain washed with imaginary incentive of lower prices at the initial stages of construction. The influence peddling is so deep rooted that it also plays with the psychology of home buyers to create a FOMO (Fear of Missing Out). And the home buyers get trapped in the cartel of builders, brokers and banks.
The very same bank that won’t lend to builder, or lend at exorbitant 13-18% interest per annum, lends to the home buyers for the same project at 8-8.5% interest. But this is one area that is for discussion some other day.
An Under Construction property comes with the attached risk of execution uncertainty, project, delays & mismatch in promise & performance. And what is the reward? Well, they would say an Under Construction property is cheaper than a Ready to Move property.
Mind you! I am only evaluating the prospects form the standpoint of an average Indian home buyer. This is the buyer who in almost all the case can afford to buy only one house in his lifetime. I am not at all addressing the concerns of the investors here. They have their own valid reasons to park money with an Under Construction property; often at a discounted price in terms of bankable transactions.
Let’s do a mathematics to explain further. A home buyer buying an apartment at the price of INR 1 crore has to pay an upfront 20% from his own savings to get bank finance. Then he also has to pay 5% GST on the property. So, he is in essence paying 25 lakhs and would wait for around 5 years to get possession of his dream home. Now, even if I discount 15-20 years of home loan interest (which he would anyway pay) there is execution uncertainty and mismatch in promise & performance hanging over his head.
Looking at it purely from the finance angle, if one doesn’t buy now and puts this upfront money of INR 20 lakh into basic bank FDs, one would get roughly INR 8 lakhs as CAGR return with 7% interest paid. Add to it, 5 INR lakh that one saves when buying a Ready to Move property. And last, but not the least, 5 additional years of dual burden of rent plus EMI. Even if a nominal INR 25,000 rent (normally a property worth INR 1 crore gets INR 25,000 as rent nowadays) is saved per month for 5 years when buying a Ready to Move property, the amount is a whopping INR 15 lakh.
So, an Under Construction property comes with an additional baggage of INR 8 lakh plus 5 lakh plus 15 lakh. Now altogether the amount is 28 lakh. But the same Under Construction apartment that cost INR 1 crore would be somewhere around INR 1.35 crore or 1.4 crore, with a generalized prevailing appreciation in the range of 6-7% CAGR.
How much difference is there; some INR 10-15 lakh and that saves you from all the troubles and execution risks. Mind you I have only calculated 7% FD interest over the initial down payment amount of INR 20 lakh. If you are smart with money management and manage to make some 10-12% returns then the upfront amount of INR 20 lakh can easily turn into INR 35 lakh in the given 5 years of time.
So, in this case the Ready to Move apartment would actually be less costly, and also save you from execution risk and mismatch of promise and performance.
There is one more piece of advice for those who are going for Under Construction Properties. Forget the financial calculations, you may repent buying an Under Construction property for your own usability reasons. In the next 5 odd years, your requirements might change; your financial conditions might change for better or worse. And then you would evaluate the cost & benefit to sulk buying a property on impulse.
Is there any flip side of buying a Ready to Move apartment? The only flip side is you may not get the same floor or corner unit that was once available at the initial stages of launch. But then it is your money and it is your choice. I rest my case.
Ravi Sinha
X : 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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