You can purchase property Directly or go for Sect0ral stock picks and PMS.
Most Indians think of real estate as a safe investment. There are also daily advertisements such as, 'Hurry, last few days left' or 'Prices only for two days. Rs 500 per sq ft price from next week onwards'. This induces people to seriously consider real estate purchases.
There are two ways investors take exposure to real estate.The most obvious one is to buy residential or commercial land. If you really believe prices are going northwards, then real estate companies must do well and if so, their stocks are likely to give better returns than real estate properties. So, invest in real estate stocks or in what is known as a portfolio management service (PMS). Let's take a look at each of these.
DIRECT REAL ESTATE
The residential category comprises more than 70 per cent of the real estate transactions in the country today. There is good scope for rental income, as well as capital appreciation. The risk is far lower than in commercial real estate, but one still needs to exercise caution before renting out a property. Do thorough background checks on the person or family. Troublesome tenants can be a big problem. Make sure you are able to address these.
Though commercial rental yields are around 8-9 per cent pre tax, they come with many risks, with the biggest being tenants not paying on time or causing damage to the property. You should be capable of handling such situations and able to vacate the tenants in case of any mischief.
Returns from commercial property over the long run will be much higher than residential ones and have the potential to deliver stellar returns if bought at the right price. Commercial leases are generally long-term in nature, unlike residential ones. Tenants renting homes generally do so from a short-term perspective, whereas businesses normally prefer long-term leases.
Real estate investments can and must be timed. To get stellar returns, you must buy at a low price or look out for upcoming places with potential for development.
REAL ESTATE PORTFOLIO MANAGEMENT SERVICE
If you are not comfortable owning property directly or do not want the hassles that come with direct real estate investments, you can also look at investing in real estate indirectly, through a Real Estate Portfolio Management Service (PMS). This is a collective pool of investments handled by a portfolio manager. The manager will take investment calls on your behalf according to the mandate of the PMS.
The strategy of the PMS can vary from one offer to another. Some PMS' can also invest only in long-term commercial rental properties on long-term leases (with MNCs and big corporates), where the yields are high and the risk is low.
Your stake in the PMS is limited to the contributions you have made. You are allocated units according to your contribution and you will receive rental income, interest income and capital gain or loss according to your share of the property.
There have been several real estate PMS offerings in the past few years, such as HDFC Real Estate PMS, ICICI Prudential Real Estate PMS and Kotak Realty Fund. This is a good way to invest in various types of commercial and residential real estate. You can address various risks of concentration, illiquidity, litigation, tenancy risk, difficulty of management and high prices by investing indirectly through a Real Estate PMS.
Through this indirect investment, you can take exposure to investments that no individual investor could have the luxury of doing, while reducing risk significantly. You can take exposure to office spaces, buildings, malls, warehouses, premium residential projects and many others through these investments. Investment size is much lower than actually buying a commercial or residential property and you are able to diversify across several properties. Of course, there is no direct control or ownership of the property. However, remember that the minimum investment required in some of the PMS is Rs 25 lakh. The recent ones, though, have a lower limit of Rs 10 lakh.
REAL ESTATE STOCKS
This is again an indirect way of taking exposure to real estate. The returns from such investments are likely to be higher, based on the logic that increasing prices and sales of a company's products will result in higher profits and thus higher stock prices. At the same time, this is a very volatile way of investing in real estate, one that you can actually feel. Most people will not feel much if real estate prices drop by 40 per cent, unless they are leveraged, because they cannot see the prices on a daily basis. However, if there is a drop of even 20 per cent in stock prices, an investor will start worrying about it.
Take the case of HDIL. The stock price doubled quickly since its IPO in June 2007, giving outstanding returns in a very short period of time. The stock crossed Rs 1,100 but the joy was shortlived, as it tanked to Rs 62. So, an investor in its IPO is yet to make money, if he did not exit on time. However, a person who bought into HDIL at Rs 62 would have a different base on which to profit. It has gone up by 500 per cent in a year, though real estate prices themselves haven't changed much. A similar story is echoed by Unitech and DLF, where the stocks are up 300 per cent from their year's lows. But, DLF is still trading lower than its IPO price.
Moral: Just like real estate, buy real estate stocks cheap and one can get stellar returns with far better liquidity at the click of a mouse. If bought right, real estate stocks do have the potential to deliver far higher re turns than real estate itself (of course, at the cost of daily volatility).
The writer is director, My Financial Advisor
