Understanding Real Estate Appreciation

Real estate investors buy property when they know that the property will gain in capital appreciation - but it is not only property investors who are attracted by this phenomenon.

There is also greater interest for buying property in Pune rather than for rental properties, since real estate appreciation allows them to increase their personal net worth, says Anil Pharande, Vice President of CREDAI (Pune Metro) and Chairman of Pharande Spaces.

What causes property prices to rise in certain areas? This phenomenon -  a key concept behind real estate investment – is called appreciation, which is nothing but the enhancement of a property’s market value over time. Real estate appreciation takes place because of various factors, including:

• The supply and demand dynamics of a particular location
• Inflationary pressures
• Home loan interest rates (cost of borrowing)
• Arrival of new real estate market drivers in a location
• Population growth

    

    Demand And Supply: When there is increasing demand for homes in a certain area, property prices go up if the amount of residential real estate projects is not catching up fast enough. In other words, self-use buyers are willing to pay more for a property because they find living in that location desirable. This demand brings in real estate investors, who buy up properties there to sell them at a profit when supply slows down again.

This causes the property prices in that location to rise even further. The time for self-use buyers to make their purchase is before investor activity starts in earnest at locations with high appreciation potential.

Inflation: Inflation is the result of an excessive amount of money in circulation, and this over-abundance of money causes its value to fall. When this happens, prices go up for a number of things – including the prices of land, construction materials, labour, legal building permits and number of other things.

However, inflation alone cannot cause the property prices in an area to rise if the area itself has poor accessibility, lacks infrastructure or is facing an oversupply of real estate projects. Township properties in Pimpri Chinchwad are fully insulated from these negative aspects because of the, superior road networks, infrastructure that is miles ahead of that available within PMC limits, and strict development laws that prevent oversupply.

Home Loan Rates: The behaviour of home loan interest rates also has a direct bearing on property appreciation. When home loan interest rates increase, the demand for property slows down because fewer buyers can afford to shell out the extra money required by the banks. By the same coin, a sufficient decrease in home loan interest rates increases affordability and boosts demand for properties.

Real Estate Market Drivers: Market drivers can be defined as developments in an area that increase the value of living there. In the case of Pune, township properties are now known to encompass many or all of these factors, which can include:

•     The establishment of a new workplace hub (such as an office complex)
•     A shopping mall and/or entertainment complex
•     Zoning regulations that do not permit excessive construction projects, thereby increasing the overall ambience via more open spaces, greenery, etc. (The Pimpri Chinchwad area of Pune is a perfect example of controlled development via forward-looking zoning regulations)

•     Transportation facilities that make the location more accessible via road, air or rail
•     Infrastructure projects that increase the quality of living in the area (such as dedicated water and electricity supply, public gardens, etc.)
•     The proximity of schools, colleges and healthcare facilities that reduce travelling time to essential services.

Population Growth: Similarly, the population growth in area such as PCMC naturally increases the demand for residential properties there, and this translates directly into appreciation in real estate rates.