Don’t get awed by big-ticket realty deals

Gulping down the news of the Rs 750-crore Lincoln House deal with a lump in your throat? There is no need to regret not being able to invest in property and earn big money. Big-ticket deals like the Mehrangir House (Rs 372 crore), Jatia House (Rs 425 crore), Maheshwari House (Rs 400 crore) and the Washington House (Rs 341.82 crore) dotting the Mumbai landscape serve important lessons to the real-estate investors.

The 50,000 square feet Lincoln House at Breach Candy was on the block since 2011. Even after the long wait, the seller had to budge from their expected price by Rs 100 crore. At Rs 341.82 crore, the Washington House was also sold below its reserve price of Rs 350 crore. So, if you are banking on a real estate investment to fulfill a particular goal, you may face hurdles like lack of buyers or long wait, especially during recessionary phases. Though the purchase price of the Lincoln house is not publicly known, we can draw similarities between other deals. The famed Worli flat in the Samudra Mahal, which was sold for Rs 21 crore (Rs 1.18 lakh/sq ft) fetched the seller 13.32% annually when we compare it with his purchase cost of Rs 700 per square foot in 1972.

As per the National Housing Board’s Residex that tracks property rates, a house in Mumbai, which was worth 100 in 2007 would fetch 238 in July-September 2014. This translates to a 13.19%. Compare this with the 10-year return of 17.12% from HDFC Top 200 scheme, which is tax free.

But these aren’t the real returns as other costs need to be factored in. Lincoln house was leased to the US Consulate. The new owner Poonawalla will have to make changes as in its present form, the house served as an office. Other costs such as maintenance fee, property tax, water tax, electricity bills, wear and tear, home loan interest, insurance costs, brokerage, stamp duty and registration fee need to be added to the total cost as well.

Also, don’t forget the taxation implications. Profits should be invested in another house or capital gain bonds to escape tax. Else, the seller would have to bear a 20% tax (if sold after three years of purchase) on the indexed amount (adjusted for inflation) of the gains. Compare this to investments in select other instruments where returns are tax-free if held for 1 year (stocks and equity mutual funds) and 3-15 years (debt mutual funds, PPF, etc.) Also, real-estate prices don’t always move upwads. Between January and March 2013, price in Delhi soared 202, but have been on a decline ever since. Between July and September 2014, the prices were recorded at 189 as per the NHB Residex. Chennai has also been seeing ups and downs regularly. You would also face a mismatch in terms of the money needed and the value of the property to be unlocked as you would have to liquidate the entire house.