Importance of Capital Appreciation in Real Estate

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.

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 labour and statutory building permit increases. 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 neighbourhood, 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 travelling 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 overall ambience 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, 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 is no tax implications imposed on capital appreciation; however, there is the 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.

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