Realty sector on positive trajectory
A prudent strategy to minimise risk and increase probability of returns in realty is to diversify investments
The real estate sector after being dormant for years in terms of realty growth and government policy initiatives is experiencing major changes.
On the policy front, the setting up of the Real Estate Regulatory Authority in April will have far reaching impact on the realty sector. Similarly, the implementation of the Prohibition of the Benami Property Transactions Act is expected to transform the traditional way of realty transactions. The full impact of demonetisation on the realty sector is yet to be experienced.
The realty slowdown for five years has changed developer and investor mindsets and perceptions about the sector. Realty assets have consistently lost value in the past five years. Falling housing prices and the subdued market sentiment has diminished the realty market’s attraction as an
investment destination. Earlier considered a relatively safer investment, now the perceived risk with an investment in the sector has increased.
So, should an investor stay pessimistic about the realty market and forgo the investment option? Or, should an investor continue to opt for the housing market, and to counter the increased risk now associated with a realty investment, explore strategies to minimise it?
Upheavals in the realty sector are real. But the investment prospects in the sector are expected to steadily become more attractive in the medium and long terms. “The realty sector is changing fast. There are uncertainties created by recent policy decisions but the trajectory of the sector seems to be positive. We can expect greater transparency and accountability in the sector. The opportunities for the end-user and the investor will increase as supply nature and volumes change in response to policy changes and demand requirements. Similarly, cheaper credit options will boost realty opportunities,” says Col RS Perhar, 59, a Chandigarh-based real estate analyst. To make most of the realty opportunities, the realty buyer should diversify his portfolio, suggest experts. The diversification options will depend on the holding capacity of the investor, the exit options he is looking for and his preference for capital appreciation of the asset at the end of the holding period or recurring returns from rental income over the holding period.
Investors should also explore the differing options in terms of the stage of construction in a project. Projects where possession is ready offer the opportunity for earning constant rental over the holding period, while the capital gain remains stable or in decline. But these extract higher premium from the buyer.
With the setting up of RERA, the under-construction projects and newly launched projects will come under it purview. Developers of such projects wikk have to register with the RERA, and fulfil all conditions and regulation that will come along with it. So, these projects are expected to offer greater transparency and developer accountability. “Earlier, the risk associated with the underconstruction properties relatively higher because of possibilities of possession delays or cost overruns. Though, at the same time, these were relatively cheaper and delivered higher capital gains after possession was delivered,” says Vikas Sharma, 42, a Panchkula-based real estate consultant.
Developed or upcoming
An investor should diversify his realty investments in terms of location. The choice or the mix can be between new upcoming areas and well-developed centres. Rahul Singla, 38, running an investment consultancy company, says, “Properties in a greenfield location are cheaper than the Grade A location properties. An investor through prudent mix of properties in these different locations can balance his realty investment portfolio and minimise his risk while staying invested in the property market.”
An investor can opt between a number of smaller properties or a bigger property. For instance, an investor with Rs 60 lakh can invest in three smaller properties in different locations or a single property worth Rs 60 lakh at a location. “Spreading one’s investment in different properties minimises the risk for the investor. One can expect that a loss in property can be offset by profit in another. Similarly, investing in a number of properties allows for better exit options and higher accessibility to liquidity. Buying three properties of Rs 20 lakh each in Dera Bassi, Karnal and Zirakpur is a better investment strategy than investing in a single one of Rs 60 lakh in one location say Zirakpur,” says Perhar.
The investor can include properties from two property segments – residential and commercial. Generally, though now always, the two segments have different growth potential in terms of capital gains and rental incomes from properties. “Within a segment also, there are multiple sub-segments to choose from. For instance, in the residential segment, one can opt for a mix of apartment and plotted properties. While similarsized apartments are relatively cheaper than plots, plots offer relatively stable returns. Also, it easier to exit plots than apartments though overall it depends on the location,” says Sharma.