Real estate has traditionally been an avenue for considerable investment per se and investment opportunity for High Net-worth Individuals, Financial institutions, and individuals looking at viable alternatives for investing money among stocks, bullion, property, and other avenues.
Money invested in property for its income and capital growth provides stable and predictable income returns, similar to that of bonds offering both a regular return on investment if the property is rented as well as the possibility of capital appreciation. Like all other investment options, real estate investment also has certain risks attached to it, which is quite different from other investments. The available investment opportunities can broadly be categorized into residential, commercial office space, and retail sectors.
Investment scenario in real estate
Any investor, before considering real estate investments, should consider the risk involved in it. This investment option demands a high entry price, suffers from a lack of liquidity and an uncertain gestation period. To being illiquid, one cannot sell some units of his property (as one could have done by selling some units of equities, debts, or even mutual funds) in case of urgent need of funds.
The maturity period of property investment is uncertain. The investor also has to check the clear property title, especially for the investments in India. In this regard, the industry experts claim that property investment should be made by persons with deeper pockets and a longer-term view of their investments. From a long-term financial returns perspective, it is advisable to invest in higher-grade commercial properties.
The property market returns are comparable to that of certain equities and index funds in the longer term. Any investor looking to balance his portfolio can now look at the real estate sector as a secure means of investment with a certain degree of volatility and risk. The right tenant, location, segmental categories of the Indian property market, and individual risk preferences will prove to be key indicators in achieving the target yields from investments.
The proposed introduction of REMF (Real Estate Mutual Funds) and REIT (Real Estate Investment Trust) will boost these real estate investments from the small investors’ perspective. This will also allow small investors to enter the real estate market with a contribution as less as INR 10,000.
There is also a demand and need from different market players of the property segment to gradually relax certain FDI norms in this sector. These foreign investments would then mean higher standards of quality infrastructure and would change the entire market scenario in terms of competition and professionalism of market players.
Overall, real estate is expected to offer a good investment alternative to stocks and bonds over the coming years. Real estate investment’s attractiveness would be further enhanced based on favorable inflation and a low-interest rate regime.
Looking forward, it is possible that with the progress towards the possible opening up of the real estate mutual funds industry and the participation of financial institutions into the property investment business, it will pave the way for more organized investment real estate in India, which would be an apt way for investors to get an alternative to invest in property portfolios at a marginal level.
The two most active investor segments are High Net Worth Individuals (HNIs) and Financial Institutions. While the institutions traditionally show a preference for commercial investment, the high net worth individuals show interest in investing in residential and commercial properties.
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Apart from these, is the third category of Non-Resident Indians (NRIs). There is a clear bias towards investing in residential properties than commercial properties by the NRIs; the fact could be reasoned as emotional attachment and future security sought by the NRIs. As the necessary formalities and documentation for purchasing immovable properties other than agricultural and plantation properties are quite simple, and the rental income is freely repatriable outside India, NRIs have increased their role as investors in real estate.
Foreign direct investments (FDIs) in real estate form a small portion of the total investments. There are restrictions such as a minimum lock-in period of three years, a minimum property size to be developed, and conditional exit. Besides the conditions, the foreign investor will have to deal with several government departments and interpret many complex laws/bylaws.
The concept of Real Estate Investment Trust (REIT) is on the verge of introduction in India. But like most other novel financial instruments, there will be problems for this new concept to be accepted.
Real Estate Investment Trust (REIT) would be structured as a company dedicated to owning and, in most cases, operating income-producing real estates, such as apartments, shopping centers, offices, and warehouses. A REIT is a company that buys, develops, manages, and sells real estate assets and allows participants to invest in a professionally managed portfolio of properties.
Some REITs also are engaged in financing real estate. REITs are pass-through entities or companies that can distribute most income cash flows to investors, without taxation, at the corporate level. REITs’ main purpose is to pass the profits to the investors in as intact a manner as possible. Hence initially, the REIT’s business activities would generally be restricted to the generation of property rental income.
The investor’s role is instrumental in scenarios where the interest of the seller and the buyer do not match. For example, if the seller is keen to sell the property and the identified occupier intends to lease the property, between them, the deal will never be fructified; however, an investor can have competitive yields by buying the property and leasing it out to the occupier.
The rationale for real estate investment schemes
Real estate activity includes a wide range of activities such as the development and construction of townships, housing, and commercial properties, maintenance of existing properties, etc.
The construction sector is one the highest employment sectors of the economy and directly or indirectly affects many other sectors’ fortunes. It employs a large workforce, including a substantial proportion of unskilled labor. However, for many reasons, this sector does not have smooth access to institutional finance. This is perceived as one of the reasons for the sector not performing to its potential.
By channeling small savings into property, investments would greatly increase access to organized institutional finance. Improved activity in the property sector also improves the revenue flows to the State exchequer through-increased sales-tax, octroi, and other collections.
Real estate is an important asset class, which is, under conventional circumstances, not a viable route for investors in India at present, except using direct ownership of properties. For many investors, the time is ripe for introducing products to enable diversification by allocating some part of their investment portfolio to real estate investment products. This can be effectively achieved through real estate funds.
Property investment products provide opportunities for capital gains as well as regular periodic incomes. The capital gains may arise from properties developed for sale to actual users or direct investors. The income stream arises out of rentals, income from deposits, and service charges for property maintenance.
Advantages of investment in real estate
The following are the advantages of investing in Real Estate Investment Schemes.
As an asset class, the property is distinct from the other investment avenues available to small and large investors. Property investment has its own methodology, advantages, and risk factors, unlike conventional investments. A completely different set of factors, including capital formation, economic performance, and supply considerations, influence the realty market, leading to a low correlation in price behavior vis-à-vis other asset classes.
Historically, over a longer-term, real estate provides returns that are comparable with returns on equities. However, the volatility in realty prices is lower than equities leading to better risk management to return trade-off for the investment.
Real estate returns also show a high correlation with inflation. Therefore, real estate investments made over long periods of time provide an inflation hedge and yield real returns