Rules of realty investment

Real estate gives returns in the long haul. Are you ready for it?

A steady increase in economic prosperity in recent years has given a fillip to consumption-related sectors such as automobiles, white goods and travel and tourism. We are also beginning to witness the emergence of a class of investors willing to look beyond the traditional arenas of fixed deposits, bonds and equities and invest money in real estate, art, and so on.

While art has limited investment options, realty has been a favourite asset class for Indians. The options to take exposure to it is only increasing.

Apart from traditional avenues like land, apartments, farm houses, and commercial property, today you can also invest through Real Estate Venture Capital Funds (REVCFs) and portfolio management services (PMS).

REITs/REMFs, the most suitable vehicles for small investors, have not been launched in India. However, PMS let’s you invest in similarly structured schemes at a higher ticket size.

NOT LIKE STOCKS
Physical investment in Indian real estate differs from investment in stocks in certain aspects. Prominent among these are:

• Transparency: It is a fragmented, unregulated and opaque sector, whereby a prospective investor does not have access to reliable data regarding demand & supply, price points and authenticity of title. This is a shock for investors used to dealing in the well-regulated stock market. 
   
• Marketability: A lay observer may get the impression that there is unlimited demand for real estate, considering the ever-increasing prices. Yet, many have experienced great difficulty when trying to undertake sale of property at short notice. In other words, matching of buyers and sellers does not happen as smoothly as in the stock market. 
   
• Liquidity: As a consequence of poor marketability, liquidity suffers. Hence, only invest that amount which you will not be requiring at short notice. 
   
• Ticket size: Unlike stock markets, which welcome small investors, the real estate market caters only to high net worth individuals, as the minimum investments required run into several lakh or, in the metro cities, crore.

REVCFs are a relatively easier route to invest in real estate, as a lot of effort pertaining to due diligence of the property is obviated. The ticket minimum ticket size in these is Rs 25 lakh. These are usually structured in the form of seven to 10-year closed-ended funds, involving two stages, investment in the first half of the tenure and liquidation, during the last part of the life of the fund. Some funds can also extend the tenure by a few years to allow for orderly liquidation of their investments. While investing in REVCFs, be careful about:

• Pedigree of the promoter: This helps in two ways. A promoter with good credentials will be able to source good deals for the fund and one with good credibility could ensure the interests of small stakeholders are protected. 
• Interim liquidity arrangements: Choose a fund where the promoters offer interim liquidity by either offering concrete buy-back arrangements or commit to sourcing a buyer from the market. However, also be aware of the valuation methodology used while undertaking the buy-back.

GENERAL TIPS
Remember that investing in a property is different from purchasing it for self use. Hence:

• Do not borrow: Cut your coat according to your cloth. Undertake investments only if you have surplus money solely for this purpose, which you can lock-in for a long period. It is not prudent to borrow for this purpose, as there is no compelling need to invest. Do not get swayed by any alluring tax benefits on such borrowing.  
• Buy early: Entering a property during initial stages of construction lets you get better appreciation by the time it gets completed. However, buy the property only if it is a reputed builder. This will cut the risk of project completion and delays.  
• Commercial properties: These investments not only give you better rents but also capital appreciation would be higher in commercial properties. However, try to locate a tenant as soon as possible.

Do not haggle over microscopic differentials in rentals. Once the rental income commences, it will at least cover your costs such as monthly society charges and government taxes. Also, try and invest in an asset which is not too far from your place of residence. Unlike financial assets, physical assets require periodic inspection and maintainence.

• Have a pre-defined investment horizon: Having this will prevent you from being too greedy and always holding out for higher prices.  
• Tax angle: Only property sold after a holding period of three years enjoys the benefit of long-term capital gains. Hence, do not purchase property with the aim of quickly flipping it.

The writer is vice president, Parag Parikh Financial Advisory Services