8 Factors That Can Derail Your
Property Investment
- By Anil Pharande, Chairman of
Pharande Spaces
Experienced real estate investors recognize that
anticipating obstacles is equally important as identifying opportunities.
Ignoring possible dangers might reduce profitability and jeopardize long-term
objectives. Let's look at eight of the most pressing challenges, as well as
concrete measures for protecting your returns.
1. Rising cost of capital -
reduces real returns
Borrowing costs influence both your financing expense and the benchmark yield you seek to outperform.
India's policy repo
rate rose from 4.0% in January 2020 to 6.75% in August 2025, a 2.75 percentage
point increase, while consumer inflation averaged 5.1% yearly throughout the
same period. When your mortgage interest rate or other cash returns equal or
surpass inflation, your 'real' profit approaches zero.
Strategy: Get
fixed-rate loans when borrowing costs are low. Also, choose micro markets with
above-average rental and capital appreciation.
For example, Moshi, Punawale, Ravet, Wakad, Pimpri,
and Pimple Saudagar in Pimpri-Chinchwad Municipal Corporation (PCMC) have all
delivered above-average rental yields of about 4-5% and capital appreciation of
8-12% CAGR over the last three years, thanks to PCMC's metro and superior
highway connectivity, proximity to IT/industrial hubs, and rapid infrastructure
upgrades. In another scenario, in 2024, rentals in Hyderabad's IT corridor
increased by 7.8%, compared to a national average of 4.6%.
2. Taxes - a predictable
drag if not managed
Stamp duty, registration fees, annual property taxes, and capital gains taxes can all devour 15-30% of your overall earnings.
For example, buying a Mumbai property for Rs 1.2 crore in 2015 and selling for
Rs 2.4 crore in 2025 results in a 20% tax on half of the profit, reducing your
net gain to just 24% over 10 years.
Strategy: Consult a tax
professional to maximize potential deductions including first-time homebuyer
stamp duty refunds, Section 80C principle deductions, and Section 24(b)
interest write-offs. Consider adding Real Estate Investment Trusts (REITs) to
reduce pass-through tax rates.
3. Regulatory surprises and
compliance risks
Land-use regulations, environmental approvals, and registration requirements may change rapidly.
In 2023, Maharashtra's RERA rule
required projects to refile documents within 90 days or face suspension; one
Pune developer saw resale prices drop 12% within two months of their RERA
registration expiring.
Strategy: If you have invested in land for development, consult with a legal expert before registering for RERA or obtaining land titles.
Also, keep an eye on local
planning boards for rezoning requests or infrastructure plans that may affect
growth possibilities.
4. Oversupply and changing
demand patterns
What's blazing hot today may cool tomorrow. Bengaluru's Whitefield corridor added 15,000 units between 2021 and 2024, exceeding demand and resulting in a 9% price reduction in early 2025.
Meanwhile, CBD office demand fell 14% as hybrid work gained hold, while
peripheral business parks experienced 6% annual value improvements.
Strategy: Monitor
absorption rates; less than six months of inventory indicates good demand.
Favour mixed-use complexes that combine residential, retail, and office space
to diversify income streams. Integrated townships are excellent investments
from this standpoint.
5. Sales and liquidity
constraints..
Real estate is inherently illiquid, and forced
transactions frequently result in 10-to-20% discounts. During Pune's 2020 COVID
shutdown, 'urgent sale' listings sold at significant discounts. If debt
commitments or situations necessitate a speedy leave, discounts can deplete
equity.
Strategy: Maintain cash
reserves that cover 12-18 months of expenses and financing charges. Maintain
loan-to-value (LTV) ratios below 60% to decrease refinancing risks.
6. Natural Disasters and Safety
Risks
Floods, earthquakes, and cyclones may all devastate property values overnight. Thane's low-lying suburbs had major monsoon floods in September 2022, resulting in an 8-10% value decrease and Rs. 250 crore in insurance claims.
While ordinary plans cover structural losses, they rarely
address market depreciation or company interruptions.
Strategy: Avoid
high-risk floodplains and earthquake zones whenever possible. Invest in
comprehensive, flood-adjusted insurance riders and set up emergency maintenance
funds.
7. Opportunity cost of capital
A Rs. 5 crore investment in a Mumbai property yields a net rental yield of roughly 4% per year, whereas an identical amount invested in, say, a data centre or a luxury property in a popular vacation destination earns 7-8% for a comparable credit risk.
Failure to compare other
assets may lock you into inferior allocations.
Strategy: Conduct
thorough opportunity-cost evaluations, comparing predicted internal rates of
return (IRR) for various asset categories, including residential, industrial
warehouses, REITs, and infrastructure loans. To maintain flexibility, consider
allocating a portion of your portfolio to liquid securities such as REIT units
or bonds.
8. Macroeconomic and
geopolitical shocks
Interest rate changes, currency volatility, and political tensions all have an impact on the real estate market. The 2022-2023 China-Taiwan impasse reduced foreign direct investment in India's housing industry by 15% while delaying project launches by 10%.
Crude oil price spikes
frequently drive central banks to hike borrowing costs, putting pressure on
both developers and buyers.
Strategy: For large projects, prefer local currency financing and consider interest-rate swaps.
Also, stay up to date on global developments and shift your focus to resilient
segments such as logistics parks if cross-border threats worsen.
Developing a Strong Investment Plan
No one flaw will shipwreck every transaction, but the cumulative effect of these risks can be disastrous. Always calculate 'real' net gains after deducting all taxes and inflationary effects.
Diversify across
asset classes and markets, combining residential holdings with commercial,
industrial, and alternative assets to smooth returns.
Maintain prudent leverage and liquidity, and if you
are serious about your real estate investments, always seek expert advice -
work with chartered accountants, legal experts, and local market analysts to
negotiate complexity and avoid issues.
By incorporating these risk-mitigation measures
into your investment strategy, you ensure that your real estate holdings not
only expand, but also withstand changing market cycles and unexpected
shocks.
About the author:
Anil Pharande is CMD of Pharande Spaces, a leading real estate construction and development firm famous for its township projects in Greater Pune and beyond. Pharande Promoters & Builders, the flagship company of Pharande Spaces and an ISO 9001-2000 certified company, is a pioneer of townships in the region.
With the recent inclusion of Puneville Commercial
into one of its most iconic townships, Pharande Spaces taken a major step towards addressing Pune's current
and future requirements for fully integrated residential-commercial
convenience.
