Property Investment in Kharghar (Navi Mumbai)
This write-up from my blog series “Real Estate Experiences from the Real World” will reveal some insights about how a thoughtful real estate investment could turn out to be an unhappy deal.
The Investment
This instance is about my Mumbai- based friend who was looking for a good investment option with higher appreciation potential and promising returns. My friend, therefore, decided to spend his hard savings on the propelling real estate market with the intent to own a residential property, exclusively in Mumbai region. For this very reason, he even skipped considering any other place, including his hometown — Kota — despite the assured prospects of higher rental income.
My friend had limited real estate options within the set budget, while most new residential developments were happening across locales of Navi Mumbai and Outer Thane. In the year 2013, after multiple property visits and numerous discussions, he finally decided to buy a ready- to- move 2-BHK flat in Kharghar, Navi Mumbai area. The unit, with a super built-up area of 900 Sq. Ft., was part of the Sujata Empress residential project by Raikar Group.
The Financials
All- inclusive price of the apartment was INR 67 Lacs, for which my friend paid INR 18 Lacs in cash, utilizing his personal- savings. For remaining INR 49 Lacs, he opted for a bank loan with monthly EMIs (or Equated Monthly Installments) of about INR 50,000. At the time of purchase, my friend’s annual salary payout was INR 20 Lacs. Therefore, managing cash flows for the EMI amount, which was less than 25% of his monthly income, was never a concern.
The Expectation
While analyzing the deal, my friend had anticipated that the unit’s price could escalate to around INR 1.5 Crores — that is almost double — in just 5 to 7 years. The key driver to support this positive development was the Navi Mumbai Administration’s announcement to launch Metro in this suburb of the city, which was already going in full swing.
The Decision
The investment decision looked wise, as every aspect, including infrastructure and amenities, was in favor while the real estate market was also booming at the time of purchase. The pace of Metro construction was also promising and overall seemed to positively support the bet. The only red flag at that time, however, was the lower rental yield of less than 2%.
Capital Appreciation and Leverage Effect
With a lower rental yield of 1.5% and an annual value appreciation of only 2% to 2.5%, the overall returns (rental+ price appreciation) of the property was way less than the borrowing cost of 9%.
These discouraging Returns on Capital (RoC) and much lower net monthly rental (after maintenance) have deeply disappointed my friend.
To Conclude
It is a classic case where leverage has backfired, and the anticipated advantage went utterly wrong, as the return on capital was much lower at 2.5% against the higher borrowing cost of 9%. Besides, an unexpected delay in Metro and elevated inventory levels have hampered my friend’s expectation of booming returns in 4 to 5 years from this real estate investment. It is, therefore, best that he dispose- off the flat to recover financial losses and invest in a property that can ensure better yield.
