Build your strategy on a foundation of selectivity. Don't expect across-the-land appreciation of real estate. Choosing the right location and the kind of property that there is demand for holds the key.

By Radhika Dhawan

Building hopes of striking it rich in real estate? Tread carefully: there is a lean, mean brood of property agents on the prowl. The mushrooming of tiny holes in the wall with tacky signboards announcing property-agents is a sure-fire sign of good times in the real estate market. Today, the signboards are still there, albeit tackier, but the spaces inside are transformed, hosting travel agencies, pcos, photocopying machines, restaurants, and even Internet cafes. In short, the real estate market has sunk to its lowest. If what goes down must, eventually, go up, will property prices ever head northwards?

Well, yes-and no. The property market yields no easy answers. Although the sector is looking at some of the most promising policy-changes in a long time-the repeal of the Urban Land Ceiling Regulation Act (ULCRA) and the Rent Control Act-investing in real estate is by no means a cent-per-cent capital-appreciation strategy. There is no likelihood of a steep recovery in prices in any sector-commercial, residential, or retail-in any city. Warns Akshaye Kumar, 33, Managing Director, Colliers Jardine: ''If you have an investible surplus, tread carefully into the property market after clearly understanding the dynamics of it.'' Adds Pranay Vakil, 45, Managing Director, Knight Frank: ''In the past, the predominant segment of buyers comprised investors trading in real estate. Today, the market only witnesses need-based activity.''

Which means that the good ol' days of 1993-94-when investment in property actually fetched returns of 5 per cent a month in cities like Mumbai-are over. Prices are not going to skyrocket overnight. There are other signs of a maturing market: the sector is becoming increasingly professionalised, with both buyers and builders paying more attention to the quality of construction, specifications, and schedules. Why, there is even a mutual fund being planned by Dundee Mutual Fund to channel investments into companies that derive value from real estate investments-like housing companies, housing finance, hospitality companies, and even those companies which have large amounts of real estate holdings to be developed. All this could succeed in limiting the role of black money in the property market.

History is reassuring: even after prices crashed in 1995-a national average indicates that property prices have declined by between 20 and 25 per cent since then-investments in real estate performed better than investments in other instruments, such as gold, silver, or stocks. In fact, Rs 10,000 invested in real estate in October, 1992, was worth Rs 30,500 6 years later; in comparison, the other 3 investments remained, more or less, stagnant. Avers P.P. Dharwadekar, 74, Senior Vice-President (Corporate), Ansal Group: ''It is an ideal medium for long-term investment.'' Counters Siddharth Yog, 26, Associate Director, CB Richard Ellis: ''The crash in prices in 1995 was a result of an investor-led speculative market. The bubble had to burst.'' Both have a point. But where does that leave the investor looking for capital appreciation?

Small cities and towns are beautiful. For, the scope for healthy capital-appreciation is limited in the metros. Despite the decline, a comparison of property-rates in the top Asian cities shows that Mumbai and Delhi feature in the Top 15 in any category: residential, commercial, or retail. Of course, the suburbs of metros could turn out to be lucrative investments-even today. For instance, Delhi is being deserted by corporates-like Coca-Cola, Bechtel, PepsiCo Holdings, and British Gas-who are increasingly demanding better social and physical infrastructure, and moving to suburbs like Gurgaon (Haryana) and NOIDA (Uttar Pradesh), where a software technology park is also coming up. Real estate rates in Gurgaon, for instance, have gone up from Rs 1,000-Rs 2,000 per sq. yard about a decade ago to Rs 6,000-Rs 12,000 a sq. yard now depending on the location. For instance, land near good roads may cost as much as Rs 10,000 per sq. yard. The best may be yet to come.

Similarly, in Mumbai, there is a strong demand for movie-theatres and entertainment-centres in the suburbs, and the outlook for good quality retail space seems optimistic due to increased demand from fast-food chains, like McDonald's. There is one exception to the metro rule: Chennai. The leave-and-licence market has been buzzing in the city compared to the other metros-an indication of transnational interest. Says Colliers Jardine's Kumar: ''The metros are likely to see the least appreciation for a long time.'' If you are looking for faster price-escalation, head for the small cities and towns, particularly those surrounded by pockets of industrial development.

There is no ready list of such centres, but some names roll off easily: Pune and Ahmedabad on the West Coast are coming of age. In fact, satellite towns of the big metros hold promise. There is a flurry of activity in Hapur and Meerut (both in Uttar Pradesh), which are within 60 km of Delhi. The other notable mentions are Hyderabad, and Amritsar, Ludhiana, and Jullundhar-all in Punjab, which the real estate boom bypassed due to terrorism-and the suburbs of Bhopal, Kanpur, and Lucknow.

Choose the category of your real estate investment carefully. Take Pune (Maharashtra). There is lack of quality retail space in Pune, complain a host of transnational brands, like Levi's, Wrangler, and Dominos, that have entered the city in the last 3 years. Therefore, the demand for retail space is expected to continue unabated. According to Knight Frank, retail yields are expected to range between 15 and 18 per cent in Pune compared to between 10 and 15 per cent in Delhi, and 12 per cent in Mumbai. On another front, the industrial activity in and around Pune helps too. The Pimpri-Chinchwad-Bhosari complex is one of the largest complexes in Maharashtra. A chemical zone (Daundh, Kurkumbh), and the new industrial estates at Baramati are just an indication of the fresh activity in the area.

Moreover, UB 99 has encouraged investment in small towns. The built-up area ceiling for housing projects that enjoy a tax-holiday under Section 80-I(A) of the Income Tax Act has been increased from 1,000 sq. ft to 1,500 sq. ft at all locations except Mumbai and Delhi. This should give a fillip to construction in small towns. It would also pay to wait a while since prices are expected to crash in Class A and B towns-where almost 75 per cent of the excess land can be found-when the ULCRA is repealed. ''When?'' is the operative word since the repeal would require follow-up initiatives from individual state governments.

Another form of industrial activity that might merit tracking is the software industry and the software technology parks. Indeed, the move of companies like Microsoft and Oracle to Larsen & Toubro's Hi- Tech City in Hyderabad, and Andhra Pradesh Chief Minister Chandrababu Naidu's infotech activity is expected to send real estate prices soaring by about 20 per cent in the state. The government plans to develop 50 global software cities across the country. Real estate buys around these cities would, naturally, be winners. For instance, Maharashtra has already planned to set up software technology parks at Nagpur and Nashik. The entertainment industry is also gaining momentum, in the form of multiplexes. Certain states are promoting this activity with sops, which will lead to real estate appreciation in the earmarked areas and surrounding retail outlets.

UB 99 has been one of the most promising budgets that the sector has seen in a long time. A key move is that corporates will enjoy increased depreciation of 40 per cent as compared to 20 per cent on new units. This is expected to encourage business to invest in housing for employees so as to add to the housing stock. The budget has also raised the tax-ceiling on interest on loans for self-occupied property from Rs 30,000 to Rs 75,000. Due to these reasons, it is the lower residential segments which are expected to be revived first. Says Kumar: ''The Rs 10-20 lakh market has already started buzzing.''

However, it would be prudent for a real estate investor to seek cash-flows through rentals rather than a capital-appreciation strategy. There are several reasons for this. While the days of steep decline might be ending, property-prices are not likely to witness steep appreciation relative to other modes of investment, like pharmaceuticals or infotech stocks. Forecasts A.V. Goel, 40, Managing Director, Brooke International: ''We expect prices to remain steady for at least the next 6 to 9 months and, then, a gradual appreciation at best.'' Besides, with the economy being depressed, it is unlikely that real estate prices will spurt confidently.

On the other hand, the rental market is likely to cough up better yields. In cities like Mumbai, the leave-and-licence market is witnessing steady activity, with chunks of demand coming from foreign banks and corporates. In Mumbai, the residential leave-and-licence market still outnumbers the market for outright transactions in the ratio of 3:1. Rental yields range between 10 and 12 per cent in Mumbai, and between 9 and 14 per cent in Delhi. Clearly, the real estate market still remains an attractive-and essential-investment option. But don't take anything for granted. Remember, whenever there's a price-quake, skyscrapers crash the fastest.

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