Property Investments in India have normally been a gold mine for most investors. The growth and development of cities across the country have added fuel to the rise in prices across the country.
Anil Rego (more)
CEO & Founder, Right Horizons | Capital Expertise: Mutual Funds ,Tax ,Property
The promise of real estate in India
Property Investments in India have normally been a gold mine for most investors. The growth and development of cities across the country have added fuel to the rise in prices across the country. According to a survey conducted by ASSOCHAM, 65% of working individuals prefer real estate as a mode of long term investment.
Property prices in India have increased by 16.5% in the last year according to a study by Makaan.com. The question now for investors is how best to benefit from investments in realty; whether to look at investments directly in property or route the investments to real estate companies that are listed on the stock markets.
Investment in Real Estate Stocks:
The realty index has recently underperformed the Sensex by as much as 47%. This raises a question on why companies are not able to replicate the returns that investors make while investing on property. Real Estate companies have been facing volume pressures and are burdened with huge debts which lead to outflow of cash towards interest rate commitments.
Increasing interest rates are a double whammy for real estate stocks as its add pressure on bottom lines for companies plus reduces demand as customers postpone real estate purchases. Increasing costs of raw materials add pressure on the margins of real estate companies. Investors can also look at the land base, debt levels and the segmental diversification of the company.
Investmens in Property:
The lure of investments in property will never fade in India. Property prices in upscale Gurgaon and Navi Mumbai have appreciated sharply. Down south, cities like Bangalore, Chennai have also seen good returns on property. As prices in tier 1 cities have already gone up investors could look at investment opportunities in select tier 2 and tier 3 cities. Tier 2 and Tier 3 cities offer prospects for returns as they stand to grow faster over the years proportionate to the growth of the economy.
Mysore is one such example; the city today plays host to global orgnisations like Infosys. Other cities like Lucknow, Jaipur, Chandigarh, Ranchi, Guwahati, Bhubaneshwar, Thiruvananthapuram, Bhopal and Jammu and even smaller ones like, Kochi, Madurai, Vizag, Cuttack, Ludhiana, Nagpur and Aurangabad are catching up fast. One needs to focus on cities where there is commercial and industrial development so as to benefit from an uptick.
However, real estate investments are predominantly a long term investment providing low liquidity to an investor. Investors can look at renting out their property (resedential or commercial) if the idea is to have a continuous revenue stream. This can also help lower the burden of EMI’s for a property purchased by a loan. One can also look at renting out apartmentns as service apartments.
Companies always look for cheaper accomodation for their employees and serivce apartments provide an alternate to hotels across countries. This help to get higher rental yields compared to residential use. One should always tread with caution while investing in any investment avenue.
Investments in property, though stable, results in investments being locked in for a long period. Investments in shares could provide higher returns, provided greater analysis is done on the company and the entry and exit points are timed well. Investors should also ensure that the investment is in sync with the financial plan so that the investor is able to achieve his/her finacial goals
> Real estate is a good long term investment. The preferable time horizon for real estate is four- seven years for it to deliver best returns. The low liquidity results in poor prices in case of distress sales. e.g during the last downturn people had to sell their properties at throw away prices as they were unable to pay their EMIs. Hence only invest long term surpluses and where you do not require liquidity.
> Real estate is also cyclical, though the cyles are significantly longer than equity cycles. if timing is wrong, it can also lead to losses or poor returns.
> Invest in areas that are developing. Eg on the outskirts of the city or in tier 2/3 cities where development is expected to result in strong real estate prices.
> Investing in equity shares of real estate companies can be rewarding if well timed, however, the volatility is significantly higher considering that real estate stocks are normally high beta stocks.
> Study fundamental factors before investing in equity shares of real estate companies. Interest costs, land bank, demand for housing, interest rates to home loan borrowers, etc can impact real estate stocks.
High inflation and interest rates could adversely impact real estate stocks and hence at this time direct investments into real estate would be a preferred option.
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