22nd Aug 2014
The last few months have witnessed the first signs of revival of demand for real estate. As the government launches various programs to develop urban centers and smart cities with focus, RBI makes it easier to banks to lend to affordable housing, Real Estate Investment Trusts makes it easier to develop large commercial projects and consumers start returning to market, the real estate sector is going to be one to watch out for from the investors angle.
Investors today have a range of options to invest in the Real Estate sector right form low risk- low return to high risk-high return opportunities. They need to understand these different options in the correct perspective to make an informed decision.
For the sake of clarity we have discussed these options in two broad categories:
Direct Investments: Buying a property directly
Indirect Investments: Taking exposure to the Real Estate sector through financial instruments which are based on real estate assets
1. Pre-launch properties
Many Real Estate Developers keep a quota of 5-10% of apartments to be sold to investors at a discount to the launch price. Generally the launch in this case could be 3-12 months away and the investors get these special rates if they agree to pay 50-100 pc of the value of the apartment upfront. Although this is the most popular mode of investing one needs to check up the stage of the project development before making such investment i.e. whether land has been purchased and conveyed to the Developer, plans put up to Corporation for approval etc. Investing in a project when the Developer is still aggregating land can be extremely risky especially for retail investors as in India, such acquisition can get stuck at any stage.
2. Property at launch stage
This is a low / medium risk medium term investment. Buying at the launch stage eliminates risks associated with land acquisition and approvals like planning permission, environmental approval etc. Midsized townships which get developer over2-4 phases e.g projects with 5-15 Towers are the ideal target for such investment as the developer keeps escalating the price for each phase. Thus the investors get a natural escalation as the project developer over 3-5 years.
Here there is a good opportunity to get good price by paying higher money upfront or forming a group and approaching the Developer to offer a bulk buying discount.
3. Completed properties for rental
There are certain areas in each city which have a high demand for rental apartments due to factors like proximity to Colleges, IT Parks, Manufacturing hubs etc. Investors can evaluate Projects in this vicinity which offer ready possession apartments or those close to completion stage and quickly put them up for rentals. Such areas also see a better liquidity and salability for apartments as there is a demand from new investors as well as people who are staying in rented apartments also want to own one after a few years.
4. Preleased commercial properties
There could be good opportunities to own shops and offices which are already rented out by existing investors in the coming years. There was a general oversupply of commercial space over the last 3-4 years and people who had invested before this period in under-construction projects would be looking at exit opportunities as their holding period has already got extended. Although the effective rental yields can be as vary significantly and are generally lower than Bank FD rates, the overall returns including the potential appreciation in property over the medium to long term cab make this an attractive investment.
5. Plots and Farmhouses
However with hundreds of plotting schemes floating in the market, one has to tale extreme precautions to ensure that that the plots that are being purchased are such that one can get building permission on them, the title is clear and your name finally gets recorded on the title documents. For this investors must take proper legal opinion form an independent advocate and not rely on the Of course the brand of the developer, his previous successful projects, location and price are the standard checks that one must do before even considering a proposal.
6. Non-Convertible Debentures (NCDs) of realty companies
NCDs can be a good option to earn higher yield ranging 16 – 18%. These are secured by mortgage of land, receivables etc. of real estate projects. The yields are higher to account for the higher risks associated with the instrument since their interest and principal repayment is backed from cash flows from a real estate project which can be prone to fluctuations. One has to ensure the past track record of the developer as also understand the specific project and its risk factors before
7. Contribution to Private Equity Realty Funds / Portfolio Management Schemes
Private Equity funds investing in Real Estate have become a popular mode of investments for High Net Worth Investors over the last few years. SEBI regulations make the mandatory minimum investment at Rs 1 Cr per investor hence this opportunity is available only to HNIs, Corporate Treasuries, Non-Resident Indians (in case it’s a FDI fund), family offices etc.
8. Long Term Bonds for affordable housing (proposed)
To fund the shortfall of affordable housing in the country, RBI in July announced allowed Banks to issue long term bonds. Banks have been given certain concessions like exemption from setting aside amounts for statutory reserves and priority sector which will give such Bonds more attractive than Fixed Deposits. Some Banks like ICICI and Yes Bank have already shown interest in issue such Bonds in near future. From investors perspective they will get an avenue to invest money for the longer term than the maximum 3-5 year deposit tenure than Banks otherwise offer. To begin with such Bonds might be more targeted towards Institutional investors like Banks, Pension funds, Insurance companies but will as the market but as they gain market acceptance, the retail investors will also get an opportunity to participate.
9. Real Estate Investment Trust units (expected)
SEBI has announced rules for Real Estate Investment Trusts (REITs) which will create opportunities for investors to put money into large income generating commercial properties like IT Parks, Malls etc. Developers will be able to transfer such projects into trusts called REITs who in turn will do a public issue of units which investors can subscribe to. With the guidelines in place such REITs should take off this year. The advantage is to investors is that they get a financial instrument which is backed by security of both property and cash flows.
10. Shares of listed Realty companies
After several years, the BSE S&P Realty Index is showing the first signs of revival up 23% this calendar year. Most listed realty companies were being subjected to huge discounts over their issue price due to issues like delay in projects, concerns on corporate governance etc. With a string of positive developments this year like a stable pro-business Government, focus on urban development through initiatives like smart cities, various schemes for affordable housing etc., realty company stocks are back in the limelight with expectations of a long term revival.