They stopped making land long ago. So in the long run, humans will have to make do with whatever God gave us to start with! And so as in any finite supply but with a growing demand, prices are bound to move up.
Property prices are also subject to volatility as in the case of equity, but delivers similar returns. Given this basic premise, property qualifies for a presence in an investment portfolio.
How does it impact a portfolio?
Vacant land, well secured, has the highest potential to appreciate. It does come with its riders.
If located away from present urban areas, your vision that development will reach your location should be well founded.
- Ensure that titles have been cleared by a lawyer.
- You must protect it from encroachment by at least building a fence around it.
- Agricultural land will appreciate to expectations only if there is a possibility that the government will allow commercial exploitation sometime.
- Allow a longer time frame for appreciation, just as in equity investing. The returns will be comparable.
- Liquidity is low. Allow for a 6-month time frame for selling land, in the least.
Commercial property is a great option, if you are looking for income with growth. Rentals, by nature are regular, and hence akin to interest from deposits, but with a kicker - the capital appreciation in the long run.
Rentals are generally linked to inflation. They increase every year to the extent of inflation at least, protecting the real value of your money. This clause is acceptable in most lease agreements. It is useful in a post retirement scenario.
- Investment levels are higher.
- Given the low liquidity of property, it should not occupy a large portion of your investment portfolio. Between 30 per cent and 60 per cent is generally a fine level.
- Tenants must be screened for quality and ease of handling.
Residential properties, such as apartments are not a great investment idea. Rentals from apartments have a lower yield than commercial rents. Appreciation in the longer run is not as attractive as a commercial property. In fact, as the buildings grow older, the appreciation may taper off. Many investors are attracted by the idea of 'flipping' apartments.
That is, they book multiple apartments at launch of a project and sell them at a premium before completion. This works in a bull market - but one never knows when this can change. Even as I write, the markets have turned, and many investors are saddled with stock, which they may have to sell at a discount.
Lastly, the home in which you live is never to be counted as an investment.
- Since you will not be selling it, the appreciation in market value will not be unlocked.
- Even if you do sell, an alternative house would cost you as much, unless you decide to move into a smaller home or one that is much further away from the city.
- A home is not an investment - it is a liability. It is a cause of expense due to maintenance, furnishing etc. No income comes out of it. It is more a drain on income!
Investing in property:
Apart from the traditional ways, real estate mutual funds once allowed (are not yet allowed) by Securities and Exchange Board of India will be a good medium for investing in property. It is expected that the regulatory authority will shortly prescribe the framework for such funds to operate in India.
In other countries, as in the USA, Real Estate Investment Trusts are the accepted mode of investments into realty. These are listed on the exchanges, too, for easy liquidity.
Private funds have been in vogue in India for a few years. But the minimum amount of investment per person is high at Rs 1 crore (Rs 10 million) to Rs 5 crore (Rs 50 million). There is a private label fund from Optimix dedicated to realty and realty related stocks which is one way to benefit from realty as a category.
Another trend in realty is to buy and share a large commercial property with many others. Each may buy 2500 sq ft upwards of a large floor plate and the developer leases the entire floor plate to one tenant, with the rent being shared in proportion to the ownership.
The author is managing director, Hexagon Capital Advisors Pvt. Ltd. He can be reached at bhagavat@hexagononline.com.
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