Getting real on real estate

Investors have various options, but the risk-return game must be played carefully.

The real estate sector has always attracted interest. It is primarily because in good times, it can be a multi-bagger. But the reverse also holds true. Investors, especially the high net-worth individuals (HNIs), show special interest in this sector. No wonder portfolio management services (PMS), private equity players and builders try to tap them.

Direct investment
Typically, builders like to tap HNIs to invest in properties, when they are starting with their projects. The investment provides them a platform to promote their project, and the funds can be used as working capital.
 

PROS AND CONS
Investment option	Advantage	Disadvantage
Direct Investments	Ownership resides with buyer and property is usable	Ticket size is the highest. Has managerial hassles
Real Estate PMS	Exposure to variety of properties starting at Rs 25 lakh	Typical lock-in period of 3-4 years. Has fund management charges of 2 per cent and profit sharing
Direct Stock Exposure	Has high liquidity and the least ticket size	A high risk-high return option. Evaluation of companies tricky

For an investor, it means an investment of anywhere between Rs 25 lakh and Rs 1-2 crore, or even more. This route of investment ensures clear ownership and accessibility. “In a direct investment, the entry and exit points can be determined by you. Also, you have a clear picture of what your commitment entails,” says Pranay Vakil, chairman, Knight Frank.

However, before investing in a residential or a commercial property, ascertain your intentions. For instance, if your aim is to earn capital gains, a residential property may be preferable as the appreciations in property prices are better.

If you are looking for a regular income, a commercial property has the potential to earn you a higher rental yield. It can earn a return of 9.5-11.5 per cent annually, as compared to a four-five per cent return from a residential property.

Besides the monetary investment, direct ownership involves managerial commitment. You will have to be hands-on regarding maintenance, interaction with brokers and the legal aspects of lease contracts. These can increase costs.

Portfolio management services
A comparatively lower ticket of Rs 25-50 lakh is also an option for diversification. PMS is a collective pool of investments handled by a portfolio manager. They make investment decisions on behalf of the investors.

“Investors can get exposure to a variety of residential and commercial properties such as retail, office spaces and warehouses. They can spread the risk over a number of properties, instead of investing in a single property,” says certified financial planner, Gaurav Mashruwala.

Each real estate PMS has its own mandate.Some are builder funds, that is, the investments are made in under-construction properties. The profits made on sale are shared among the investors.

Another variant of PMS is a rental-yield fund. Anand Rathi Financial Services and Knight Frank recently launched such funds.

A rental-yield fund invests in office spaces only, and rent provides a regular return. On the closure of the fund after six years, investors will earn from the appreciation in the value of properties. The investment in a real estate PMS is made in tranches.

Also, there are costs involved such as annual fund management fees and profit sharing. While professional management of the fund can be a benefit, it can also prove an impediment as you have no control over the investment.

Before investing in a PMS product, be sure of the lock-in period. An exit midway, though possible, is not easy.

Direct stocks
Those with limited funds to invest can consider direct stocks. They are also the most liquid option among others. “One needs to consider factors such as the developer’s land bank, selling price of properties, the inventory held, the ability to execute the projects, etc before investing in the stock,” says Ambareesh Baliga, vice-president, Karvy Stock Broking.

But careful stock picking is required. This is because the movement in realty stocks can be city- or area-centric. For instance, if Mumbai/Delhi property prices are doing better than other cities, listed stocks of companies that are doing business are likely to move up faster than others.

Remember that valuation of real estate companies can be tricky, as well.