How Is Capital Appreciation Relevant To Your Property?
Most of the investors carry out investments in the real estate sector with the objective of capital appreciation. Capital appreciation can be defined as a situation wherein an investment gains value, and the same is reflected through its market price. An example of capital appreciation could be situations in which the stock price goes up or a position in which residential property value increases. You can calculate the capital appreciation on the property by taking the difference between the current price and the asset’s purchase price.
It is to be noted that the capital appreciation on the property is not reflected or relevant to any other changes that occur to the property, nor does it count any income which is generated from the given property. Thus capital appreciation is the change or increase in the asset’s value over what you originally paid for it. Most investment options such as financial securities (such as stocks and bonds), real estate, and precision materials (like gold) rely on capital appreciation.
But, firstly, what is capital appreciation?
The term “capital appreciation” refers to a growth in the market price of an investment. Capital appreciation gets computed as the difference between the sale price and the acquisition price of an investment. However, it gets determined only at the moment of sale. Equity stocks, mutual funds, real estate, gold, and other commodities or tradeable investments can all experience capital growth.
For example, if an investor pays Rs 100 per equity share for a stock and the market price rises to Rs 120, the investor obtains a capital gain of Rs 20 per equity share.
But what about capital appreciation in real estate? Capital appreciation in real estate is the worth of your property and how much it improves in value over time. As the value of your property rises, you gain a few advantages. For starters, selling the property will net you more money. As long as demand in your market is high, you may charge a higher sales price and profit more. House prices might fluctuate based on factors such as the success of the real estate market. When an owner can sell their property for less than they purchased, they have generated capital growth returns.
Mr. Ingus acquired land in Hyderabad is one of the perfect capital appreciation examples in real estate. He paid $200,000 for the land in January 2016. The price has already risen and gets expected to reach over $2,25,000 by 2020.
But, what are the factors affecting Capital Appreciation in Real Estate?
Capital appreciation takes place when the asset is affected by the following factors:
- Demand and supply dynamics of a particular location: When there is an increase in a particular locality population, there is also an increase in demand. Thus, when there is an increase in the demand for homes in a specific area, the property’s price or value in the locality also increases. There will also be an increase in the real estate projects in such a locality as well. Some of the real estate owners also purchase property in such areas with the intention of resale when the supply reduces, and the price of the property increases further.
- Changes in fiscal inflation: Inflation occurs when there is excess money circulating, which essentially reduces the value of money. In such circumstances, the prices of input items such as land, construction materials, construction labor, and statutory building permits increase. However, inflation will not affect the property price if the area is itself deficient such as poor accessibility, social and civic infrastructure, or oversupply of residential projects.
- Cost of borrowing: Capital appreciation also takes place based on the banks’ interest on the home loan provided for the property as well. Any changes, may it be upward or downward, in the home loan interest rates will have a direct effect on the appreciation of real estate property. Thus, when there is an increase in the cost of borrowings, there will be a decrease in the demand for the homes as the buyers may not be able to afford higher EMIs. On the other hand, when the home loan interest or borrowing cost decreases remarkably, there will be an increase in the demand as the affordability increases and market sentiment improves.
- Property market drivers: Recent infrastructural developments or other new real estate market drivers such as schools, shopping malls, airports, or increased public transport facilities in a particular area can also appreciate the relevant asset’s value. By making specific pertinence to residential land, ‘market drivers’ refers to all or any developments in a neighborhood, positively impacting buyers’ desirability and convenience. Some of the market drivers include:
- The development of new office complexes or widening of employment opportunities in the area.
- Development in terms of access to the shopping mall or hypermarket.
- Availability of educational institutes and hospitals in a locality whereby the buyers can reduce traveling time.
- In the case of the township or any other real estate investment, there must be zoning regulations in an area that helps prevent any excessive development from happening, leading to densification. Homebuyers may be looking for available open spaces, greenery, and the overall ambiance of the location while making investments in residential property.
- Access to public transportation facilities is also an essential factor as it proves that the locality is accessible by road or rail.
- Factors such as new infrastructure projects which boost the overall quality of living in the location, flyovers, water reservoirs, etc., can also affect the appreciation of property value.
Capital Appreciation vs Capital Gain
Capital appreciation is unrealized of the property that has been acquired. It can also be stated as the amount which shows that your investment has grown while you were holding the property. On the other hand, the capital gain is the profit you receive during your property’s sale. When you sell your property, the financial growth turns from capital appreciation to capital gain. There are no tax implications imposed on capital appreciation; however, there is a tax on capital gains.
The Bottom Line
Summing up, capital appreciation can be termed as the increase in your investment value since the time of its purchase. The term capital appreciation is an essential concept of which new investors should be aware. It is calculated by taking the asset’s current value and deducting it from the cost of acquiring the property. Any investment asset, including stocks, bonds, real estate, and more, which has gained market value, can earn you capital appreciation. Appreciation does not apply to any other value apart from market value, and thus income such as interest payments and dividends are not considered.
Assetmonk is an online investment platform that offers you the property in globally renowned markets such as Chennai, Bangalore, and Hyderabad. The properties provided by Assetmonk are customized, keeping in mind the objectives and pocket size of their investors. Contact us for investment assistance.
Importance of Capital Appreciation in Real estate FAQs:
The capital appreciation fund attempts to increase the asset value by employing investments in high-growth and value stocks. These funds are also called aggressive growth funds, capital opportunity funds, or capital gain funds.
The growth funds is the classification that focuses on capital appreciation.
Capital appreciation can be calculated or determined by deducting the current asset value from the price paid on it at the time of purchase.