In the last couple of years, the property prices have corrected 20% to 30% (unofficially). No one dares to accept this fact. This correction or property devaluation is because of lack of demand and thus oversupply. Any price correction because of lack of demand is not in the hand of the buyer. His only fault is that he selected wrong area/project. Let me clarify that price correction is not a city-wide phenomenon. There will be always pockets with decent or stable demand. In such areas, price remains stable or appreciate.
Another type of property devaluation is because of a legal defect in the title of the property. I shared it in detail in my post, 10 Reasons for Defective Property Title. Lack of proper research or Ignorance is responsible for the property devaluation in this case. The 3rd reason is external say govt notified the property or change in the master plan of the city. A marital dispute after the property is purchased or fraud is some of the common reasons for property devaluation. I highlighted some of these external factors in my post, Beware of Heavily Discounted Property.
In this post, we will discuss project/apartment specific factors responsible for the property devaluation.
5 Apartment Specific Factors Responsible for the Property Devaluation
1. Maintenance of the Apartment:
Recently one of my client Mr. Premlal was planning to buy a flat in the Gachibowli area of the Hyderabad. Trust me the location of the apartment is fantastic. The apartment is sandwiched between some of the big corporate houses in the area. The rental value is Rs 30,000 p.m. The property price is 75L for 1500 sqft 3BHK flat. In other words, Rental yield is 4.8%. Rental yield of more than 3.5% is considered to be a bonus in residential space and in my opinion, it is a steal. At one point, i thought of buying this property. Just Kidding :).
The catch is that Mr. Premlal was not convinced to buy a flat in this apartment. He was in a double mind. His only concern was the maintenance/upkeep of the apartment. In my opinion, the fair value of the property is approx 1 Cr considering the high rental yield of 3.5% in Hyderabad. In other words, there is a property devaluation of 25L because of poor maintenance of the apartment. The apartment in question is fetching excellent rent only because of location advantage but buyers are not willing to invest/buy. Thanks to Resident Welfare Association of the apartment.
2. Mobile Towers:
I don’t want to get into a debate whether the mobile tower is a health hazard or not. The general public perception is that it is a health hazard thus responsible for the property devaluation. The buyer’s who purchase under construction property from builder fails to notice one imp clause in builder buyer agreement. I find this clause in almost 99% of the builder buyer agreements. This clause states that builder reserves right to install a mobile tower on top of the apartment and right to retain the income from the same.
Forget about under construction property, recently one of the largest mobile operators heavily advertised initiative to upgrade the mobile network. It sounds customer friendly initiative but at the end of the day, the mobile operator is furthering its business interest. Under this initiative, the mobile customer identifies the gap in network coverage. Normally, such blind spots are inside apartments in metro cities. The company then tie up with the apartment association to install the mobile tower and mobile users are used as pressurizing tactics for the same. The company is also engaging mobile users to get permission for towers in residential areas.
All said and done, the fact of the matter that the mobile tower in an apartment is responsible for property devaluation. Normally, buyers don’t prefer to purchase property in such apartment complexes.
3. Unwritten Rules:
There are certain unwritten rules in each society and these rules are also responsible for the property devaluation. For example, some of the apartments only allow people from specific community/religion to buy a flat in the apartment. As per various rulings of the court, these are illegal practices but unfortunately it is an unwritten rule. One of my friends stuck in one such apartment in Mumbai. The property devaluation is not a concern in such apartments. The objective is to stay as a close-knit community. On the contrary, some people prefer to stay only in such apartments :).
Sometimes these unwritten rules can also help to increase property valuation. For example, in one of the apartments in Bangalore, the association allow renting of flats only to families. This apartment commands a premium in the area. Normally, families would not like to stay in an apartment with majority flats rented to bachelors/PG’s. PG’s and Bachelor flats are a nuisance for any apartment.
Also read: How to increase the resale value of a home?
4. Past Appreciation:
Though it might sound strange but it is TRUE that past appreciation in property price is responsible for current property devaluation. Here i will explain with a real example based on my interaction with one of the clients. There is a project A in Pune. It was launched in 2003 and completed in 2006. During 2003 to 2006, the area was considered as one of the upcoming areas on outskirts. The project was SOLD in the price band of 23L to 35L with an average price of 30L.
Fortunately for my client, this area in Pune witnessed astronomical growth in last 10 years. The current market price is around 1.2 Cr i.e. 300% appreciation in 10 years or original investment multiplied 4 times. Now when my client tried to sell her property as she was planning to buy 2 flats of 60L each in the upcoming area i.e. one for herself and 2nd for her daughter. She was shocked to know that flats in her apartment are listed for around 90L to 1 Cr. When she spoke to some of the owners who have listed the property at a lower price, they told that they are happy with 3 times return i.e. 90L. It is a human psychology. If i am getting unexpected then i will not target extraordinary. Secondly, by doing this they are able to sell their property in shortest possible time.
Assuming appreciation would not have been 4 times i.e. from 30L to 1.2 Cr & current market price is 60L then i can bet no one would have been selling below the market price of 60L. Higher the past appreciation higher the property devaluation compared to current market price. This is one of the reasons for property devaluation in Navi Mumbai and Sohna Road in Gurgaon. People who bought at the much lower price will not mind selling at 20%-30% discount compared to the market price. In this case, the buyers locked at a higher rate are stuck :(.
5. Construction Quality:
There is a misconception that if the builder is reputed then the construction quality will be world class. Please note that most of the reputed builders are only using their name for marketing of the project. The construction work is outsourced to some 2nd rung builders engaged in construction activity. Let me take the example of my own apartment. The builder is very well known but later i came to know that half of the blocks were constructed by Builder A and rest half by Builder B.
The construction quality of Builder A is good but blocks constructed by Builder B are of below average construction quality. There is a price difference of approx 10L in a flat of the same size constructed by builder A and builder B. The point i am trying to make is that construction quality is also responsible for the property devaluation. Another important point is that the quality of the construction can be ascertained only after 5-7 years of construction. If you find seepage or any construction related issues in a ready to move in or recently constructed apartment then i can give it in writing that it is TRASH. Better avoid such apartments. As i keep highlighting that most of the new constructions have seepage issue, therefore, better to avoid property purchase in such apartments. Seepage is like an Old Age, Once it comes then it never goes. Whatever treatment you apply, seepage surfaces again.
Words of Wisdom:
You will never find a perfect apartment in this world. At the same time, there are negotiable and non-negotiable factors. The factors highlighted by me in this post are mostly non-negotiable in nature from a buyer’s perspective. It’s a no-brainer that mostly non-negotiable factors are responsible for the property devaluation. Therefore, as a seller, you will suffer and may have to take a hit on the returns from the property in the already subdued market.
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