Property is bought for two purposes - either for selfuse of for investment to generate rental income. If the property buying is for investment purposes, there are a few things to consider. Firstly, all that glitters is not gold, likewise not all real estate investments offer good returns. Secondly, apart from rental properties there are now available other real estate investment options. And most importantly, the rental pay and cost appreciation of real estate, like any other asset class vary over different time periods and relies upon market patterns.
FACTORS TO CONSIDER FOR PROPERTY INVESTMENT
Property investment is one of the most secure investment instruments in India. The investors must factor in foremost the location of the property. The return on the investment potential of the property is directly proportional to its location, neighbourhood and connectivity. Next the investor must ascertain that the property in question is duly approved and all the documents are in place. Some of the key approvals to check are Encumbrance Certificate, power of attorney (PoA), completion certificate, municipal approval, fire NOC, RERA registration and so on. It is always advised to be invested with a reputed developer with good track record even though it may come at a premium. In case of a loan, be aware of the payment plan or conditions of the developers. In most cases, the payment is made in accordance with the construction status of the property. If the property is ready to move in, ensure to get the possession as soon as you deposit the money. Select the financial institution which offers the lowest rate of interest but be cautious of the hidden charges if any and be doubly sure of the legitimacy of lending agencies.
TRADITIONAL REAL ESTATE INVESTMENT OPTIONS
Rental Built Properties – A property to invest in could be a residential, shop or an office that is at a good location, approachable and well-connected. A well located property with good social and physical infrastructure around has greater chances of getting tenants and good rent return.
Vacant Land – One can also invest in land parcels in lieu of a constructed property as land does not diminish in value and the returns potential would be excellent after 20-30 years. The key to capital gains through land purchase is to get a plot for sale that is free of encumbrances, has undisputed title deed, local approvals and other necessary paper work in order.
Long Term Lease Properties – Large offices, factories and commercial spaces can be given out on a long term lease to corporate or businesses. One-time documentation, strict lease terms and availability of legal recourse make such lease an attractive proposition.
Under-Construction Properties – As the under-construction projects take time to complete, an investor can book a property with low input cost which is a fraction of the amount that would have been used in the acquisition of a ready-to-move-in unit. The remaining amount can be paid in phases. Also, the value of the property will go up by the time of the possession. However, there are risks as well, such as quality or delay in possession. Buyers should check for reviews on the project, RERA registration, developer’s track record and other information concerning the project.
NEW WAYS OF REAL ESTATE INVESTMENT
Real Estate Investment Trusts (REITs) – REITs are a great way to invest in real estate without the hassle of owning a property and maintaining it. REIT is usually a large company which owns and manages large income-generating real estate such as warehouses, large office spaces, shopping malls, hotels and commercial properties of different kinds. One can invest with a small amount and can earn from the rental income generated by the managing bodies based on his/her investment. Moreover, REITs can be traded on the stock market and provide the benefit of faster liquidation than traditional properties.
Infrastructure Investment Trusts (INVITs) – Similar to REITs, retail investors can also invest in Infrastructure Investment Trusts or INVITs. Infrastructure Investment Trusts are large companies which own and manage operational infrastructure projects like highway projects, power plants, airports, transmission lines and large scale pipeline projects etc. and earn from the income generated from these assets. INVITs are designed and managed in such a way that 80 per cent of the investors’ money is invested in revenue-generating and completed projects. This mitigates the risk associated with under-construction projects.
Real Estate Stocks – Another way of investing in real estate without buying a property or land is by investing in a real estate company. An investor can earn from the growth of the real estate market over the long term by buying equity shares of large-cap real estate firms. With the focus on housing development in India increasing continuously, the real estate and construction stocks promise good return in the long term. But like any other stock, returns may vary over different time periods.
Real Estate Mutual Fund – One of the most popular ways of taking advantage of the growth in the real estate market is to invest in a pool of real estate stocks. Although the direct investment in stock poses a high risk. Instead, one can choose a thematic mutual fund which focuses on the real estate market wherein a group of top real estate companies are targeted. The Mutual fund way of investment minimizes the risk as the differential performance of various players normalizes the returns.
IS THIS THE RIGHT TIME TO INVEST IN REAL ESTATE
The decreasing returns potential of other financial instruments such as Gold, Fixed Deposits and bonds and sharp fluctuations in financial markets has prompted the investors to once again look at real estate as an investment option. Especially for the investors who are looking for a risk-free asset to park their money. Though chances of increase in real estate prices are high, yet experts’ advice against committing a large sum in real estate for the purpose of investment as the returns might be limited.
According to Shubham Arora, Director, Sheerbulls India Pvt Ltd, the average rental yields from residential are moderate and mostly in the range of 2-4%. However, there are specific asset classes such as student housing, rental homes, and co-living space that can render higher rental returns. "Barring the stock market, most of the other popular alternate assets are in a tailspin. The bullion markets are still volatile. FD rates mostly remain unattractive. Amidst such shifts, real estate continues to be a viable option for investors. It is an evergreen asset and this is one of the reasons more than 80% of the household income in India is parked in it. In contrast, only ~ 5% are directed towards the stock market. It is a hard asset and can be a good hedging strategy against rising inflation. In addition, the downside risk of a possible price increase by developers can’t be overruled.”
However as per Jitendra Salonki, a Noida-based Sebi-registered investment advisor, Real estate investment in commercial property can help an investor diversity one's portfolio provided the rental income is invested in mutual funds in SIP mode. “Average annual rental on residential property after deduction in annual maintenance and various municipal tax payments would fall around 2.50 per cent per, whereas same would come around 8 per cent if it is a commercial property.”
ADVANTAGES & DISADVANTAGES OF REAL ESTATE INVESTMENTS
For Indians, real estate is a highly stable investment option, which comes with low risk and brings mental satisfaction of securing the future. Indeed, whether residential or commercial, real estate has the potential to generate passive income for the investors with additional tax benefits such as tax deduction on mortgage interest, operating expenses and legal costs, property taxes and depreciation. One may argue the property incurs the cost of maintenance and renovations, still the value of real estate increases the longer you hold it.
One should go for equity instead of putting money on second home as investment. Alternatively, one can look for opportunities in the commercial real estate space, which could provide higher yields. However, liquidating one's investment would be slightly lengthy as it is more physical process than digital and there is no partial withdrawal in real estate investments. Moreover, unlike mutual funds, real estate investment doesn't give power of compounding to an investor where an investor gets interest on interest.
It should be noted that just like the financial markets, real estate is not completely devoid of risk. There are numerous kinds of risks such as market, economic, and developer-related risks in the sector. To make safe investments and enjoy higher yields, it is essential for investors to have a prudent risk management strategy in place. In a country like India, despite aggregate trends, regional disparities exist.
Putting the money across assets such as residential, commercial, retail, warehousing, etc. optimizes the overall returns. It will spread risk across assets and the overall impact of any possible downtrend in a particular category will be limited. Just like the developer’s credibility, it is important to verify the functional dimension of the project, which includes utility, floor plan, design, specification, etc. A good quality project will attract more investors, buyers, and tenants, thereby rendering better returns.
IN THE OPINION OF EXPERTS, 5-10 PERCENT OF AN INVESTMENT PORTFOLIO SHOULD CONSIST OF REAL ESTATE WHICH COULD COMPRISE REITS, LAND, AND/OR CONSTRUCTED RENTAL PROPERTY.