how lu­cra­tive is Real-es­tate as an Al­ter­na­tive As­set Class

Once con­sid­ered the most pop­u­lar as­set class, real es­tate is now be­ing ques­tioned for its at­trac­tive­ness due to an ex­tremely buoy­ant eq­uity mar­ket in the last 3-4 years. Di­pali Gandhi, Head of Re­search, ASK Prop­erty In­vest­ment Ad­vi­sors ex­plains.

Realty Plus - - Table of Content -

Real es­tate has tra­di­tion­ally been one of the most at­trac­tive as­set-class for In­di­ans for a va­ri­ety of rea­sons in­clud­ing high re­turns, park­ing of black money, tax sops on in­vest­ment, pass­ing on as in­her­i­tance, fi­nan­cial sta­tus, di­ver­si­fi­ca­tion in port­fo­lio al­lo­ca­tion etc. More­over, it was also pre­ferred by many due to its phys­i­cal and less volatile na­ture com­pared to eq­uity, de­spite it be­ing illiq­uid. How­ever, due to stag­nancy in real es­tate prices since the global fi­nan­cial cri­sis and a spate of trans­for­ma­tional re­forms an­nounced in the last 2 years like the in­tro­duc­tion of RERA, levy of GST, Be­nami Prop­erty Act, re­moval of tax sops and most im­por­tantly de­mon­eti­sa­tion have led to a con­sid­er­able re­duc­tion in de­mand es­pe­cially the one led by in­vestors. There have been in­stances of in­vestors strug­gling to exit their in­vest­ments who had in­vested in mi­cro mar­kets, mainly based on in­fra­struc­ture an­nounce­ments like Dwarka Ex­press­way in NCR, Pan­vel and be­yond in Mumbai etc.

al­ter­na­tive in­vest­ment funds (aifs) In­vestors can opt for in­vest­ing in real es­tate fo­cussed Al­ter­na­tive In­vest­ment Funds (AIFS) that have ac­cess to the prof­its and cash flows of the project and are not re­ally de­pen­dent on price es­ca­la­tion in fu­ture. One can di­ver­sify risk as funds in­vest in mul­ti­ple projects across ge­ogra­phies. Not only do the AIFS en­able fi­nan­cial clo­sure of the project, they also con­trol the project cash flows and fo­cus on com­ple­tion and sales, which in turn en­ables them to exit in a timely man­ner. As th­ese AIFS struc­tured fi­nance to de­vel­op­ers with an eq­uity kicker, in­vestors can be as­sured of preser­va­tion of cap­i­tal with reg­u­lar re­turns through pe­ri­odic pay­ments and can also en­joy sur­plus from the project. How­ever, one should thor­oughly eval­u­ate cre­den­tials of the spon­sor, man­age­ment, strat­egy, per­for­mance track record, risk man­age­ment frame­work, as­set man­age­ment fo­cus etc.

look­ing for­ward The fun­da­men­tal de­mand for hous­ing will con­tinue to re­main in­tact, as home own­er­ship will al­ways be a pri­or­ity as­pi­ra­tion for all In­di­ans. Home buyer con­fi­dence which was com­pletely shaken due to com­ple­tion risk and af­ford­abil­ity, will grad­u­ally re­vive due to a com­bi­na­tion of im­prove­ment in macro eco­nomic con­di­tions, job cre­ation, re­duced in­ter­est rates which are now at a multi-year low and ever in­creas­ing ac­cess to hous­ing fi­nance. Most im­por­tantly, the Gov­ern­ment’s thrust on af­ford­able hous­ing seg­ment with the ini­tia­tive of “Hous­ing for All by 2020,” prom­ises a pos­i­tive out­look for the sec­tor. The strong macro and pos­i­tive im­pact of the pol­icy re­forms have cre­ated a con­ducive en­vi­ron­ment for resur­gence of the real es­tate mar­ket. In fact, the mar­ket re­cov­ery this time round, will be more sus­tain­able, backed by reg­u­la­tions. It would con­tinue to be a lu­cra­tive as­set class but only for in­vestors with a long term hori­zon, as the era of gen­er­at­ing short terms gains is now be­hind us!

With a grad­ual de­mand re­vival, prices will ap­pre­ci­ate but the pace will be much slower, given the con­sid­er­ably high in­ven­tory lev­els. One should in­vest in real es­tate only with a long term hori­zon.

Di­pali Gandhi

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