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