Property has traditionally been an avenue for considerable investment by itself and investment opportunity for High Net-worth Individuals, Financial institutions in addition to individuals considering viable alternatives for investing money among stocks, bullion, property and other avenues.
Money dedicated to property because of its income and capital growth provides stable and predictable income returns, similar to that of bonds offering both a typical return off market on investment, if property is rented in addition to probability of capital appreciation. Like other investment options, real estate investment also offers certain risks attached to it, that will be quite distinctive 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 danger involved in it. This investment option demands a top entry price, suffers from not enough liquidity and an uncertain gestation period. To being illiquid, one cannot sell some units of his property (as you can have inked by selling some units of equities, debts as well as mutual funds) in case there is urgent need of funds.
The maturity period of property investment is uncertain. Investor also offers to check the clear property title, particularly for the investments in India. The industry experts in this regard declare that property investment should be performed by persons who've deeper pockets and longer-term view of the investments. From the long-term financial returns perspective, it's advisable to buy higher-grade commercial properties.
The returns from property market are comparable to that of certain equities and index funds in longer term. Any investor searching for balancing his portfolio can now look at the real estate sector as a safe method of investment with a certain level of volatility and risk. A right tenant, location, segmental kinds of the Indian property market and individual risk preferences will hence forth end up being 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 little investors'point of view. This may also allow small investors to enter the true estate market with 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 norms for FDI in this sector. These foreign investments would then mean higher standards of quality infrastructure and hence would change the entire market scenario with regards to competition and professionalism of market players.
Overall, real estate is anticipated to give you a good investment alternative to stocks and bonds within the coming years. This attractiveness of real estate investment could be further enhanced on account of favourable inflation and low interest rate regime.
Excited, it's possible that with the progress towards the possible opening of the true estate mutual funds industry and the participation of financial institutions into property investment business, it will pave the way in which for more organized investment real estate in India, which may be an apt way for investors to get an alternative to buy property portfolios at marginal level.
Investor's Profile
Both most active investor segments are High Net Worth Individuals (HNIs) and Financial Institutions. While the institutions traditionally show a preference to commercial investment, the high net worth individuals show curiosity about buying residential in addition to commercial properties.
Aside from these, is the 3rd category of Non-Resident Indians (NRIs). There is a definite bias towards buying residential properties than commercial properties by the NRIs, the very fact might be reasoned as emotional attachment and future security sought by the NRIs. As the mandatory 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 tiny part of the full total investments as there are restrictions such as a minimum lock in period of 36 months, a minimum size of property to be developed and conditional exit. Form conditions, the foreign investor must cope with numerous 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 the majority of other novel financial instruments, there will be problems because of this new concept to be accepted.
Real Estate Investment Trust (REIT) could be structured as a business dedicated to owning and, typically, operating income-producing real estate, such as apartments, shopping centres, offices and warehouses. A REIT is a company that buys, develops, manages and sells real estate assets and allows participants to buy professionally managed portfolio of properties.
Some REITs are also engaged in financing real estate. REITs are pass-through entities or firms that can distribute many income cash flows to investors, without taxation, at the corporate level. The key intent behind REITs would be to pass the earnings to the investors in as intact manner as possible. Hence initially, the REIT's business activities would generally be limited to generation of property rental income.
The role of the investor is instrumental in scenarios where in fact the interest of the vendor and the buyer do not match. As an example, if the vendor is keen to sell the property and the identified occupier intends to lease the property, between them, the deal won't ever be fructified; however, an investor might have competitive yields by purchasing the property and leasing it out to the occupier.
Rationale for real estate investment schemes
The activity of real estate carries a wide selection of activities such as development and construction of townships, housing and commercial properties, maintenance of existing properties etc.
The construction sector is one the greatest employment sector of the economy and directly or indirectly affects the fortunes of numerous other sectors. It offers employment to a sizable work force including a substantial proportion of unskilled labor. However for many reasons this sector does not have smooth usage of institutional finance. That 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 usage of 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.
Property is an essential asset class, that will be under conventional circumstances not a viable route for investors in India at present, except by means of direct ownership of properties. For most investors the full time is ripe for introducing product allow diversification by allocating some part of the investment portfolio to real estate investment products. This is effectively achieved through real estate funds.
Property investment products provide opportunity for capital gains in addition to regular periodic incomes. The capital gains may arise from properties developed on the market to actual users or direct investors and the income stream arises out of rentals, income from deposits and service charges for property maintenance.
Advantages of investment in real estate
These would be the advantages for buying Real Estate Investment Schemes
• As a resource class, property is distinct from the other investment avenues open to a tiny in addition to large investor. Investment in property has a unique methodology, advantages, and risk factors that are unlike those for conventional investments. A different pair of factors, including capital formation, economic performance and supply considerations, influence the realty market, resulting in a low correlation in price behaviour vis-à-vis other asset classes.
• Historically, over a long run, real estate provides returns that are comparable with returns on equities. However, the volatility in prices of realty is below equities resulting in an improved risk management to come back trade-off for the investment.
• Property returns also show a top correlation with inflation. Therefore, real estate investments made over long periods of time offer an inflation hedge and yield real returns
Risks of investment in real estate
The risks involved in buying real estate are primarily to do with future rental depreciation or general property market risk, liquidity, tenancy risk and property depreciation. The fundamental factors affecting the value of a specific property are:
Location - The positioning of a building is crucially important and a substantial factor in determining its market value. Home investment is likely to be held for quite a while and the attractiveness of a given location may change within the holding period, for the greater or worse. As an example, element of a city may be undergoing regeneration, by which case the perception of the location will probably improve. In contrast, a major new shopping center development may decrease the appeal of existing peaceful, residential properties.
Physical Characteristics - The type and utility of the building will affect its value, i.e. a company or even a shop. By utility is meant the huge benefits an occupier gets from utilizing space within the building. The risk factor is depreciation. All buildings suffer wear and tear but advances in building technology or certain requirements of tenants could also render buildings less attractive over time. As an example, the necessity for big magnitude of under-floor cabling in modern city offices has changed the specifications of the necessary buildings'space. Also, a building that will be designed as an office block might not be usable as a Cineplex, though Cineplex may serve better returns than office space.
Tenant Credit Risk - The worthiness of a building is a function of the rental income as possible expect for from owning it. If the tenant defaults then the owner loses the rental income. However, it's not only the danger of outright default that matters. If the credit quality of the tenant were to deteriorate materially during the period of ownership then the sale value will probably be worse than it otherwise might have been.
Lease Length - Along the leases can also be an essential consideration. If a building is let to a high quality tenant for an extended period then the rental income is assured even if market conditions for property are volatile. That is one of the attractive top features of property investment. Because along lease is a significant feature, it is very important at the time of purchase to consider along lease at the time when the property is likely to be re-occupied. Many leases incorporate break options, and it is a standard market practice to believe that the lease will terminate at the break point.
Liquidity - All property investment is relatively illiquid to most bonds and equities. Property is slow to transact in normal market conditions and hence illiquid. In poor market conditions it can take even longer to discover a buyer. There is a top cost of error in property investments. Thus, while a wrong stock investment can be sold immediately, undoing a wrong real estate investment may be tedious and distress process.
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