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. Did you ever think that investing in real estate would 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 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, farmhouse, commercial, retail, leisure, etc. Leisure is a relaxation place where one can spend free time or vacation.

Depending 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.

Click NEXT for more

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.

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 to 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 cannot be liquidated easily. There is no organised 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.

Click NEXT for more

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 in Mumbai, Delhi or Kolkata. Affordability also limits diversification. An investor may not be able to diversify her/his investments across various cities with Rs 25 lakh (Rs 2.5 million) or 50 lakh (Rs 5 million).

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, s/he will be doing it in her/his limited ways and means.

Is there a solution for this?

Of late yes.

There are some collective investment vehicles. An investment management company promotes these investment vehicles. 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 Rs 10 lakh (Rs one million) to 25 lakh (Rs 2.5 million). This amount needs to be invested over a period of three 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.

Click NEXT for more

The advantages of this collective investment vehicle are:

One can invest into real estate without any hassles. The professional investment management companies will manage all the hassles.

One can invest in various real estate projects at a time

One can geographically diversify her/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 that specialise 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.