Real Estate as Investment
real estate for NRIs, investment management vehicles
Read about peculiarities of real estate investment, deterrents in property investment and a few
Real estate has conventionally been an attractive investment arena in India but was privy to the rich. With general
rise in per capita income and ease in availability of home financing real estate investment is nearing the reach of
more and more people. Real estate is a long term investment. During the peak of real estate markets in early 2008
many investors made quick profits by buying ‘hot’ properties, hanging on for some months and selling them off for
cool profits. But the frenzy was short-lived and investors hoping to make profit from real estate investment must go
Compared to other assets real estate is less liquid and highly capital intensive. To be a savvy investor one must have
a detailed analysis of his/her time horizon, expenses, potential income and profit on sale. The real estate market is
not organized like the stock market or markets for more liquid assets like gold. Often a combination of appraisal
techniques must be used to determine the true value of property.
Despite the many limitations in real estate investments for those who can afford it this is an assured way to make
investments beat inflation in the long term. Any citizen of India can buy property anywhere in India. NRIs can invest in
any property expect agricultural/plantation land and farm house.
Peculiarities of Real Estate Investment
For an investor real estate investment compels commitment for a long term unlike other investments like stocks,
mutual funds, gold etc, where even investors with the intent of going long term could withdraw hastily on anticipation
of a market downfall. Real estate market functions in cycles that are correlated to economic and demographic cycles.
It is crucial to have correct judgment on what stage of the cycle an investor is in while buying or selling. Profit strategy
is to buy at a discount when nobody wants the piece of property and sell it high when it is in demand. In an upturn,
growth can be prolonged over a period of time, like we witnessed in 2008. Investors must be cautious not to be over
optimistic at such times and believe that the current trend will continue indefinitely into the future. Since the cycles are
not consistent in length it is difficult to judge how soon the current phase will end.
There is no way to discover true price of a property as the market is largely unorganized. Although in cities you can
approach real estate agents to get a rough idea of what the last traded price was there is no way to tell if the current
price is the correct price for a property.
Similarly because there is no regulation of real estate markets it is difficult to judge the quality of performance of
builders, developers and agents. There is no dedicated dispute settlement mechanism in case one arises. The onus
of verifying whether the property has clear title, land’s development is as per nod given by authorities, there are any
encumbrances are on the buyer.
Keeping aside the cost of property, expenses on registration, stamp duty, title deed registration and such other
charges make a significant chunk of the total investment. Unlike in other investments these are too big to be
Low liquidity is a big deterrent for people to make investment in real estate. At a time when it appears that property
price has appreciated sufficiently for making an exit investors may find it tough to find buyers willing to buy at that
Most of the drawbacks mentioned here are eliminated when property investment is done through investment
management vehicles. Investment management companies pool resources from a group of investors and via joint
ventures with property developers invest in diversified projects in various locations. Being professionals one can
expect that the projects they choose would be reliable ones. Management fees are charged but the biggest
advantage is that investors can invest as little as Rs 10 lakhs and exit from the investment in fewer years, say 3 to 5
years. In addition investment can be diversified across types of projects as residential projects, hospitality projects,
commercial projects, etc. However investment management vehicles are still in premature stage in India. Very few
companies in India are currently offering real estate investment products. Once a market is developed and
mechanisms are in place we can hope that real estate investment market will be more efficient like stock markets.
Real estate investment involves buying, holding, at times leasing and finally selling of property. Investment can be
made in residential property, commercial property, farmhouse, holiday home or a plot of land. Depending on risk
tolerance and time horizon between buying and selling an investor can choose property in a rural area, developing
area or a developed city or town. Generally investors prefer to invest in real estate in a locality close to their
residence. Rarely will a person living in Gurgaon seek for property investment in Hyderabad, Kolkata or Pune.
Many investors make the mistake of assuming that property prices once up cannot fall. From our most recent
experience property prices had plunged around 35% from their peak. Unlike in developed markets, in India we
scarcely have sufficient, reliable and updated data on local property trends to aid in deciding value of property.
Investment decision must be taken after considering cost of property, prospects of growth in a given number of years,
potential income until the time of sale (for example through leasing), expenses on registration & stamp duty,
maintenance costs and so on. An astute investor would measure current market trends as against his/her experience
Unless selling is unavoidable due to an urgent financial need an investor must not exit before a reasonably good deal
comes along. Selling property within 3 years of buying it attracts short term capital gains tax. Short term capital gains
tax is higher than long term capital gains tax.
life stage nri