Published & Updated as on - 2010-06-17
Investing
in real estate, in most cases, is a win-win situation if you do due diligence.
Prashant Mahesh & Nikhil Walavalkar offer some suggestions
MARK Twain’s investment advice — ‘Buy land, they
are not making it any more’ — appears to be holding good a hundred years after
the American author’s death. Whether it is Mumbai, Delhi, or even some of the
smaller tier II cities, like Coimbatore or Jaipur, real estate prices have
multiplied manifold over the past few years.
In real estate,
there is no dearth of multibaggers. There are many cases wherein properties
bought for a mere Rs 1 lakh around 1985 are today valued at Rs 1 crore or more.
This essentially means money is multiplying a whopping 100 times in 25 years at
an annualised return of 20% per annum. For instance, retired professional N
Mehta, who bought a one BHK house in Andheri, Mumbai, for Rs 70,000 in 1977, is
now receiving offers worth Rs 70 lakh.
However, while buying
property makes sound investment sense, not all investors manage to make
millions. Take the case of S Ram. In 2000, he invested Rs 3 lakh in an
apartment in Nala Sopara, a northern suburb in the Mumbai metropolitan region,
and that has now appreciated to a mere Rs 5 lakh in 10 years. But unlike
equities, in the property market, even the worst performers have generated
returns in the long-term.
On the face of it, it looks tough
to find other asset classes such as equities, bonds or gold giving you that
kind of return over that period of time. “One should hold real estate in the
portfolio, though the percentage of how much one should hold could vary from
one individual to another,” said Sashi Kumar, head (real estate investment
advisory), Birla Sun Life AMC. So, what are the ways in which one should invest
in real estate and what are the pros and cons of investing in the sector?
BUYING COMMERCIAL OR RESIDENTIAL PROPERTY
You
can buy a residential or commercial property which is under construction or
ready for occupancy. However, there is a lot of due diligence that you need to
do before taking it up. The first thing you need to understand is the
demand-supply situation in the area. You need to ask questions like what other
projects are coming up in and around the area in the near term. Secondly, you
must do some homework and find out details about the builder and check his
ability to deliver in the past. Take a look at the quality of construction of
his previous properties. Last, but not the least, floor choice and view from
the flat is very important. Many a time, builders try to sell you flats that
are least saleable — maybe the last floor or the first floor. One must remember
that while there are penalties on individuals if they do not make payments on
time, there are no penalties on builders who do not deliver on time. Besides
that, one has to also keep in mind costs, such as stamp duty and registration,
which could dent your returns. The developer may ask for the car parking money
in cash. If you want to sell your property, the developer may levy a clause
that you need an NOC from him for which he may charge you. This is especially
true if you are selling the flat before builder completes the entire project.
So, you must keep that margin in mind while making your calculations. The other
option could be to buy a commercial property and rent it out to earn rental
income. Here one must calculate the kind of returns which one can get before
getting into this.
BUYING LAND
Finite resources, if
bought at right prices, can offer phenomenal returns in the long run. Land is
no exception to this rule. Savvy investors do not mind locking in their money
with a view to generating handsome returns over the long term. While buying
land for investment, investors must look for a trigger for price appreciation.
Development in infrastructure can be a good trigger. Government policy changes
can also be looked at. Lack of trigger may not help you encash your
investments. The land should have a clear title. If you are buying a plot with
a view to selling it in future, ensure that you buy a ‘non-agriculture’ plot
with a road access. “Access to road and easy availability of ground water are
must to seek a good valuation in the long term,” said a senior advisor with a
multinational wealth management in Mumbai.
REAL
ESTATE FUND
In this case, you can bank on
a fund manager to do the needful for you. A lot of real estate funds have been
launched in India by reputed names likes HDFC, Birla, IL&FS, Milestone,
Kotak and others. Based on the theme that you are comfortable with, like
residential or commercial or two or three tier, you can invest accordingly. The
important thing is such funds are transparent in nature and you can expect a
quarterly statement on the status of your investment in the fund. Also, the
entire sum is not taken at one go; the fund manager raises money over a time
frame of three years.
BUYING REAL ESTATE
STOCKS
Unlike buying land or residential
property, which are more long term in nature, realty stocks are fairly more
liquid. Many a time, real estate stocks will not necessarily move with realty
prices. Other factors like interest rates and overall market sentiment also
impact the these stock prices. “In the short term, realty stocks cannot be the
best representatives of realty sector, but in the long term, there may be a
correlation between the two,” said Apurva Shah, head (research), Prabhudas
Liladhar. Before buying realty stocks, one should look at factors like
management quality, growth plans, the region in which the real estate company
operates and the valuations.
One should go ahead only when
one is comfortable with all the factors.
Source: ET 16/6/10
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