Real estate valuation

I have been reading about real estate valuation lately. There are various ways which people have come up to value land. But sometimes, like equity market, real estate value can defy gravity and reach unimaginable levels. I dont whether these valuations are justified. Nevertheless I have got complete freedom to put my 2paise worth opinion so I say that the current valuations in places like Bangalore etc are not justified.

Now for a moment lets forget about my opinion and look at the existing modes of valuation. First thing to consider is whether you are going to buy for person use or buy it from a perspective of an investments. If you are going to live in it and do not intend to sell it, you may buy it based on your comfort level. You can give a lot of premium on thing like a desired architecture, proximity to your office etc. Here you dont worry much about valuation because even if the real estate value falls 2-5 years down the line you will not get bankrupt or throw yourself out of the house. That is your dream house and you are living in it and you do not regret on paying the premium you did.

Dynamics change when you buy property for an investment. Besides qualitative factors like “This is an upcoming place”, “The IT industry/airport is opening up nearby” or “The property prices have apprecited 100% in last one year” there are some quantitative factors we can value real estate. Till today real estate is very unorganized kind of sector. The market comprises of:

  1. Builders who have lot of bargaining power because of their deep pockets. Booming markets have started giving soaring vauations to any tom-dick-harry involved in real estate.
  2. Brokers who try to act like a bridge between the providers and the seekers. The motivation is to get the 1% of the deal. Again to increase his 1% he doesnt mind selling the property for a higher sum and creating artificial scarcity of supply “Sir ye last flat bacha hai”
  3. The buyers are people looking for place to live or looking at investments in real estate. If people are looking from investment point of view, they would be having enough money but it is the former kind of people who suffer from soaring valuations.
  4. Banks providing loans to buyers at some interest rate for 10,15 to 20 years.

In the next post I will try to bring in some numbers for valuation of real estate.

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