Sunday, July 3, 2011

Real Estate Investments Made Simple


Gold and Real estate are very traditional investment avenues. Gold has evolved from its traditional investing and found its place in the modern sophisticated investment world via Gold ETFs. Similarly Real estate is also emerging as an investor friendly avenue with less hassle via PMS route or private equity route. Have you ever thought of investing in real estate will one day be as simple as investing in mutual funds? If no please read on….

Real Estate as an Investment:
Buying a dream house or flat to reside ourselves is basically not a real estate investment. Buying real estate with a view to generate income and capital appreciation is considered as Real Estate investments.  Real Estate investments can be further classified into residential, farm house, commercial, retail, leisure. Leisure is a relaxation place where one can spend their free time or vacation.
Depends upon his/her risk tolerance and time horizon one can invest in real estate at different risk levels. It can be at the time of converting a rural land to urban land, or at the time of building development stage or in already developed city area.

Real Estate and Risk:
Most often investors assume real estate prices will not fall down and they only go up year after year. It is not so.  During the mid 2009 some of the real estate investments were quoting below 30% to 40% from their 2007 prices. Real Estate investments are also prone for price fluctuations.

Real estate Vs Stock market:
Real Estate is a complex and complicated investment when compared to stock market.
Non-transparent: There is no transparency in the price. It is not easy for a buyer or seller of real estate to identify the last transacted price in the same locality. There is no price discovery mechanism.
Illiquid Asset: Selling a real estate is a time consuming process. It is not liquidable easily. There is no organized market for the buyers and sellers to meet.
Impact Cost: Stamp duty and registration charges are really very heavy when compared to the other investment products.
No Regulator: There is no regulator for the real estate participants and intermediaries. Anyone can become a builder. Technical qualification is not mandatory. Also anyone can become a real estate intermediary or advisor. There is no certification or training to be completed before practicing.  As there is no qualification requirement for participants as well as the intermediaries, it is very difficult to see best business practices.

Real Estate hassles:
The other hassles with reference to real estate investment are documentation, maintaining the asset without any encumbrances, and genuineness of the title deed.

There are some practical problems with diversification. Normally an investor invests in a real estate in his own locality. It is very rare to find someone in Chennai investing in the real estate properties located at Mumbai, Delhi or Kolkata.  Affordability also limits diversification. An investor may not be able to diversify his investments across various cities with Rs.25 lacs or 50 lacs.

It may not be possible for an individual investor to buy a land and develop a viable project in that land and sell it in the market. Managing the project development need some kind of expertise.  Even if an individual is able to do it, he will be doing it in his limited ways and means.

Is there a solution for this? Of late yes.
There are some collective investment vehicles. These investment vehicles will be promoted by an investment management company. The investment management companies collect money from investors. Being professionals, they will identify good projects and do joint venture with the project developers. They will be able to diversify across various cities as well as various types of real estate investments such as housing, commercial, hospitality and the like. These investment management companies charge a reasonable management fees.

At times they collect money via PMS route and at times via private equity route.  The minimum investment ranges from 10 lacs to 25 lacs. This amount needs to be invested over a period of 3 years. That is they will collect money from investors in 4 or 5 installments. After 3rd year whenever they exit from a project they will repay the principal employed in the project as well as the profit generated out of that project. End of 6th year or 7th year, the investment management company will exit from all the projects.

The advantages of this collective investment vehicle are
·      One can invest into real estate without any hassles. All the hassles will be managed by the professional investment management companies.
·      One can invest in various real estate projects at a time.
·      One can geographically diversify his investments across India.
·   One will be able to apportion his total investment into small sums in large projects like township development, Technology Park, industrial estate, health city…
·      Cost advantage because of economies of large scale operation

This is really an investor friendly investment vehicle. Apart from the regular stocks, mutual funds and fixed deposit investments investors can consider investing in these real estate products also. This will give better diversification to your overall portfolio. Also Investors need to be careful in choosing such investment options. Background of the investment management company and their transparency levels are more important. Investors can seek the advice of the professional financial planners before investing.

This investment vehicle is in its primitive form only. It still needs to go a long way. As of now there are only a very few companies in India which specializes in promoting collective real estate investment products. But in a few years time these kinds of products will be available from various investment management companies and in different varieties like our present mutual fund schemes.


(The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of
Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.)

9 comments:

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Admin said...

Those who don't know much about real estate tend to ask the question "Why should I invest in real estate?" When I'm asked that question, I tend to give the very watered-down answer that investing in real is a lot less volatile than investing in the stock market. If the person wants more information, I go into more detail with some of the reasons why real estate investing is not only one of the most lucrative ways to invest, but also one of the safest.
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Admin said...

WHAT DILIGENCE IS DUE?

The scope, intensity and focus of any due diligence investigation of commercial or industrial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon whether the investigation is conducted for the benefit of (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer; or (iv) a Lender.
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Sofia Johnson said...

Living in a condo instead of in a house is one of the Florida real estate options for newcomers. You can purchase a condominium outright, so you will own it just like you own a single dwelling residence. The condominium allows for several dwellings to occupy the space that only one house would have occupied. This means that more people can own a home. Condominiums have equity like single dwelling homes, and they have good resale values. The best part of a condominium is you do not have to do the yard work, or the maintenance on the pool. investissement immobilier

vance said...

Real estate investment is among the fast growing industries these days. Even though the global recession is hitting on many economies of the world, the future still looks very promising for a real estate investor and this means you are sure of continued long term returns. It has been said before that opportunity is in bounds in situations that involve crisis. In a bid to make this clear, it has been noted that with the sickly economies, many home owners are now selling their properties at unbelievable low prices that have never been witnessed before. With foreclosures being the order of the day, an estate investor will take advantage to acquire most of these properties, a move which will leave your bank account bloated. This is a good example of one man's meat being another man's poison.
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Deepak said...

One of India's mega city,gurgaon real estate has ultra-commercial value. As it boasts all possible world-class infrastructural amenities, its commercial value is immense. Gurgaon property is cynosure of all eyes as properties rates in gurgaon is the perfect return on investment. IT, Corporate and ITES sectors have driven the real estate engine so fast which is seeing residential as well as commercial properties in Gurgaon. Apartments in Gurgaon have become a great draw for people across India.

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HcoRealEstate said...
This comment has been removed by the author.
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