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.
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