Thursday, November 25, 2010

Real Estate investment in India

Currently we have about 300 million people residing in Urban India – appx 30% of our population – with increasing urbanisation, we will be having close to 550 - 600 million people in urban India by 2035 -  This massive wave of urbanisation in India means that our cities will grow to almost double the size in the next 25 years – we can see this happening all around us – if we compare a 1985 vintage map of any city in India  -we would realise that the city has truly expanded to almost double the size – the same thing will repeat –at a larger scale between 2010 and 2025.
Where is the opportunity hidden in this information – if you look at a 20 year horizon, invest in a plot of land (any size that you can afford) in an upcoming gated development that is 10-15 kms away from the current city limits –in 20-25 years, this locality would be part of the city and the value would have grown tremendously. Anyone who did this in 1985 knows the value of this smart investment and the same opportunity exists even today. The key issue here is that the land must be safe from encroachment for this period of 25 years - hence it must be a gated or walled development.
Real estate investment in India offers tremendous potential to get a 20% plus returns – it is quite difficult to make a mistake if one knows the basic rules of investing in real estate. Real estate investment is like a fixed deposit with near zero risk giving atleast 15% returns per annum. Once you have about 10-15 lacs worth of assets created – make your first real estate investment –- leverage your position by putting 20% of the investment from your savings and remaining 80% through a loan. Leveraging is a commonly used technique in this area as the investments are in large chunks and the appreciation of property is normally more (15-20%) than the interest costs (10%) of the loan. My class presentation is available for you in Slideshare.net and has some scenarios described on how leveraging works.
There are broadly five ways of investing in real estate:
·         Residential properties – flats and residences with land
·         Commercial properties – offices, shops, godowns etc
·         Urban Land – commercial, industrial, residential
·         Rural land – agricultural
·         Real Estate Investment Trusts ( REIT)
I consider the other way of investment in real estate sector through Real estate equities as not truly a real estate investment as this does not represent the true real estate risk/ reward scenario in India.
Let me elaborate on these five ways on investing:
Residential properties – contrary to popular opinion, this must ideally your second investment  -not the first investment – residential properties give you capital appreciation (10-25% pa)  and rental cash flow (2-5% pa) – the overall returns are 15% to 30% pa and I believe this will go on for at least another two decades in India due to urbanisation and economic growth. The land appreciates at a higher rate than building and hence the residences with land would show a higher appreciation than flats. However, due to good common amenities (like security and club house), the flats give a higher rental yield than residences with land. A good location, a good builder /architect, good landscaping, good common amenities will give higher ROI and hence one has to select properties based on these parameters. The minimum investment required (including loan) would be around Rs 50 lacs.
Commercial properties: This must be ideally your first investment – I have not seen too many people do this as their first investment – but those who have done it are more financially savvy. The reason for this is that, the commercial properties give the same capital appreciation of 10-25% pa as residential properties – however, they give a rental yield of 7-10% pa and that is double the rental yield of residential properties. Also the minimum investment required here is around Rs. 15-20 lacs as compared to Rs 50 lacs in residential properties. Early in life, when one wants to increase the cash flows from investment, higher rental helps – hence when compared to residential properties, we must look at investments in commercial properties early in life. Once we have become financially independent ( i.e. our cash flows from investments are more than our expenses), then we can look at residential and other investments. Go to any broker, look at the Sunday edition of Times of india and you would be surprised to see the kind of options that commercial real estate offers – however, surely do a legal check and also take advice from broker on the rental yields before investing.
Urban land – Once you have become financially independent, you must invest in urban land – land gives higher capital appreciation than buildings – my experience has been at least 20% pa – normally higher if the location is good. So after having a few rental yielding properties and after becoming financially independent – focus on urban land and keep a minimum of 5 year window for these investments – you will more than double your money.
Agricultural land – Investments in agricultural lands that are 10-15 kms from some urban area will give good appreciation over 15-20 years – however, lands that are truly rural and far away from urban areas – may not give good appreciation or rental. If you are investing in lands like these – do not expect a great appreciation unless there is some development in that area in the future.
REIT  - REIT is a good way to gain from real estate appreciation without getting into the legal and asset maintenance issues – REIT’s came in India as an investment structure in the last one decade and India REIT is the pioneer in our country. The company offering REIT takes commitments of Rs 25 lacs from investors over 2-3 years and they invest this money through well known real estate developers  in residential /commercial properties being built by them – as these properties get ready and are sold, the profits from this sale are given back to the investors  - this takes about 7-8 years to materialise – there was another flavour of this REIT before recession where the REIT company used to buy existing commercial spaces and the rental yields was given as quarterly yield, and after 5-7 years, they sold the commercial assets and returned the principle and profits from the investments. If you have 25 lacs to invest and do not want the hassles of legal work, property maintenance work, but still want the gains that one gets in real estate – REIT is highly recommended. These are closed funds and hence you will have to keep an eye for when these offers are available – ask your wealth manager and he will tell you when one comes up.
There are a few very logical, practical and doable tricks for real estate investment that I have shared in my class – these are in the ppt for you to see in slideshare.
As MBA’s starting your career, you must build your asset value of about 15 lacs in the first 3-5 years of work through equity route and then before marriage, invest in a property that yields rental plus capital appreciation – a commercial property is what I would recommend. Over the first 15 years of your career, you must own rental yielding properties worth 150 lacs  (in today’s value) – if you can do that, you will be financially independent by then– after that based on your savings, invest in land to get good appreciation.
But before all that, advice your parents to invest in an upcoming gated development that is 10-15 kms away from the current city limits in your city.