Why should one invest in a residential property in Mumbai?

At the age of 23 when she had just started working, Shirin Gadbade acquired a ready-to-move, two-bedroom, hall, kitchen (BHK) flat in Pancham Apartments at Link Road, Borivali (West) for an all inclusive cost of around Rs 22 lakh.

Having fully paid back the bank loan taken to fund this acquisition in 2010, she decided to invest around Rs 80 lakh in another two-and-half BHK apartment at the Rustomjee Urbania development on the Eastern Express Highway in Thane (suburban Mumbai) in 2011.

“My mother coaxed me into buying the first flat. I figured investing in property was significantly rewarding when valuation of my apartment increased significantly by the time I'd paid off the home loan. Motivated, I decided on investing in another one for investment purpose and am hoping to replicate the success in the years to come,” she said.

A perfect example of creating wealth through investing in real estate, Shirin took possession of the second residential apartment sometime in 2012. While a large a large part of the total unrealised gains of around Rs 1 crore (majority from the first apartment bought 8-9 years ago) Shirin's real estate portfolio (of two apartments) is currently worth an estimated Rs 2.5 crore odd – all this at the age of 33.

Shirin is among the thousands of other like-minded people who took the plunge investing in real estate at various stages in the last decade or so and are reaping the benefits of this timely decision that helped create wealth.

Elaborating on the approach, Om Ahuja, chief executive officer – residential services, Jones Lang LaSalle India, said it is definitely possible to create wealth through real estate investment as long as one keeps the fundamentals in mind. “Effective investment in residential property requires a location to meet certain parameters. Fundamentally, the area should have good social infrastructure, availability of adequate public transport and sufficient economic activity to sustain development and growth. In order to mitigate most of the investment risk, one should restrict one’s residential property investment to Tier 1 and select Tier 2 cities.

“The investor should keep an eye on the market and sell the residential property at the right time in order to multiply wealth. If all the above precautions have been taken, the property should have appreciated at a consistent rate of 15% per annum for three years,” sid Ahuja adding that it is important to remember that one can almost never sell at the peak, just as it is impossible to always catch the lowest price.

Going by prices compiled by real estate rating and research firm, Liases Foras, different pockets in the Mumbai Metropolitan Region (MMR) and extended suburbs delivered a compound annual growth rate (CAGR) of 20% or more for investments made in 2005. Simply put people who bought real estate assets have seen their money multiply anywhere between 3.7 to 4.9 times depending on the market they invested then.

Lets now look at how prices have behaved in the years between 2005 and 2013. The Liases Foras data for the said duration shows, on an average, real estate prices in the island city rose from Rs 6,637 per square foot (psf) in January 2005 to Rs 30,344 psf in December 2013. In the central and western suburbs prices increased from Rs 3,005 psf and Rs 3,290 psf to Rs 12,418 psf and Rs 14,344 psf respectively in the same period.

In Thane and Navi Mumbai area, average prices grew from Rs 1,934 psf and Rs 1,730 psf in January 2005 to Rs 9,190 psf and Rs 6,475 psf in December 2013 respectively. The strong growth trend in real estate prices was also visible beyond the MMR region i.e. suburbs beyond Thane and Borivali, which saw per square foot rates shoot from Rs 1,055 and Rs 1,063 in January 2005 to Rs 4,571 and 5,237 in December 2013 respectively.

While realty market over the years has shown a lot of potential for investments, the overall economic environment in the recent past has changed thus raising questions as to whether wealth creation still holds true in the current scenario. Industry experts feel it does. “Intelligent investment into residential property still holds the potential of significant wealth creation. However, the market keeps changing and one needs to understand these changes,” said Ahuja.

So if you are keen on taking the plunge and investing your surplus in the residential property segment, following are some of the options in the MMR, according to Jones Lang LaSalle India that can be looked into for potential investments currently.

Bandra Kurla Complex (BKC): Currently quoting at Rs 27,500 psf to Rs 50,000 psf can double in 4-5 years time. Budget range from Rs 6 crore to Rs 25 crore. Walk to work concept, lesser supply and Central Business District are the key drivers .

Chembur / Tilak Nagar: Currently quoting at Rs 12,500 psf to Rs 20,000 psf can double in 3-5 years time. Budget range from Rs 2 crore to Rs 6 crore. Monorail, lesser supply and Santacruz Link Road are the key triggers.

Mahalaxmi / Jacob Circle: Currently quoting at Rs 20,500 psf to Rs 55,000 psf can double in 4-5 years time. Budget range from Rs 9 crore to Rs 25 crore. Monorail, gated community, lesser supply, south Mumbai profile like this area for race course view, eastern freeway are key triggers.

Ghatkopar / Chandivali: Currently quoting at Rs 12,500 psf to Rs 16,000 psf can double in 5-6 years time. Budget range from Rs 2 crore to Rs 5 crore. Closer to Powai where multi-national companies have offices, closer to metro, eastern freeway to get terminated at Ghatkopar junction, value for money at current price points.

Mulund / Bhandup / Ghodbunder: Currently quoting at Rs 10,000 psf to Rs 15,000 psf can double in 5-6 years time. Budget range from Rs 1 crore to Rs 3 crore. Better social infrastructure, better road connectivity and environmentally best in Mumbai.

“As for areas like Wadala, Lower Parel, Dombivli, Malad, Goregaon etc. there is enough supply that will hit the market where percentage appreciation will become a big challenge. Infrastructure is collapsing currently and don't see visibility of any major developments in terms of public transport and social infrastructure,” cautions Ahuja.