Ready to occupy residential properties eliminate risks associated with project execution. It brings in benefits such as tax benefits on repayment of loans raised to fund such property, scope for price appreciation as well as some savings in the form of rents earned.
With the cash-strapped developers invariably delaying their projects in almost all major cities of India, many buyers, especially the end users have started preferring ready to move in, or properties nearing possession. In cities like Gurgaon, NOIDA and Mumbai, the average project delay is anywhere between one and two years, however, southern cities have relatively less delay in the range of three to six months. In some cases, the project delay has stretched to more than two years.
Not only there is delay in project delivery, there is also the problem that, most of the time after waiting so long for possession, the buyer feels that he did not get what he paid for. According to the National Consumer Helpline data, complaints in the real estate sector mostly pertain to delays in delivery of the apartment or plot, and/or the delivered product not being as promised at the time of booking in terms of quality, specifications and carpet area. Moreover, some times the developer even changes the layout plan of the project and adds a few extra floors.
A ready to move in property is considered as relatively low risk compared to under-construction properties as they do not suffer from risks such as variances from the promised layout plans and quality, delays and price escalations. However, as they say there is “no risk no return” the ready to occupy properties come with a price tag. Generally, the ready to move in properties are priced 25-40% higher than the under-construction properties which makes them unaffordable. In such a situation, a number of buyers, especially end-users, started showing an inclination towards projects nearing possession. Investing in such projects offers various advantages besides early possession.
Restricted risk: The projects nearing completion have mostly finished their civil work, thus the risk of variation from the original plan is limited. Apart from the risk of quality and variances from the original plan, the risk of delay is also somewhat limited because there are less regulatory approvals remained. In near possession projects, most of the time occupation certificate is the only remaining approval that requires government intervention.
Tax benefits: According to the income tax Act 1958, there are certain tax advantages available for home buyers. For example, the principal repayment upto INR 1.5 lac is eligible for deduction under section 80Cin loan taken for ready to move in properties. The interest paid for a loan on a first home is eligible for a deduction upto INR2 lakh per year, and for a second home the entire interest payment can be deducted from the income for the purpose of income tax calculation. However, one can only take advantage of these deductions after taking possession of the property. In the case of under-construction properties, one has to wait until possession to claim the tax shield available under the Income Tax Act as the interest paid during the construction period of the property can only be deducted in five equal instalments after the completion. Early possession comes with early tax advantages and saving on rent if the property was purchased for self-use. Moreover, the buyer can avoid the complexity of claiming tax advantages.
Room for price appreciation: As mentioned earlier, the ready to move in properties are priced 25-40% more than the under-construction properties and any short-term appreciation is generally unlikely if the market is already mature. Projects nearing possession not only limit the risk of delays, variances in quality and layout, there is also the scope for appreciation in the near future once the project becomes fully operational. Generally, the project gets another 10-15% appreciation once it is habitable and fully operational. This appreciation depends on occupancy, demand, amenities offered at the project and a number of other factors.
Savings on rent: The ready to move in properties nearing possession are best for end users who are living in rented premises. If one is planning to occupy the property there can be savings on rent. Moreover, if it is being purchased as a rental property, the rental income can also help you to pay EMIs. In the case of under-construction property, one ends up paying the EMI as well as the rent and if the property possession gets delayed, the whole financial situation may become distressed. However, if a loan is being taken to buy the property,one should never rely huge on the rent yield to pay EMI as the property may sit empty for a month or two.
Despite all the above pros of investing in ready to move in or nearing possession property the bottom line is that both under-construction and ready to move in properties have their pros and cons. Selecting between ready to move in and under-construction or nearing possession projects entirely depends on your property requirements. For immediate requirements, it makes sense to go for completed properties. If you are looking for higher returns and have idle money for investment, an under-construction property yield a better ROI and gives decent time to arrange for funds and offers flexibility in payments.
About the author
Surabhi Arora, leads the research team in India and has more than13 years of experience in carrying out multi-disciplinary research and analysis in the area of finance and real estate industry. Surabhi specialises in real estate economics, policies, commercial and residential real estate research with in-depth knowledge of market dynamics across major markets in India.