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Invest in realty through physical or financial mode based on your risk appetite written by Dipali Gandhi, published in DNA. January 1, 2019

Real estate has conventionally been a preferred choice for most Indians. For ages, Indian investors have been investing in physical real estate. However, over the years, real estate funds have emerged strongly, but is largely confined to High Net worth Individuals and family offices, considering the minimum ticket size of Rs 1 crore. Soon investors will have an additional avenue to participate in commercial real estate through Real Estate Investment Trust (REITs).

 

Physical residential real estate

 

Real estate, as an investment class, has typically delivered consistent returns to investors. But one must undertake adequate research on parameters like project location (including site visits), its proximity to job corridors, access to social and physical infrastructure and whether it is largely driven by end users. Check on developer credentials in terms of quality and timely delivery through the past track record.

 

Though the industry is now under a new regulatory regime through RERA (Real Estate Regulation and Development Act), it is still work in progress in many states. One should check if the property is registered under RERA. Once implemented effectively, RERA can be a powerful tool for investors.

 

Ready-to-move-in properties don&rsquot entail possession risk and what you see is what you get &ndash immediately. In any case, due to the sheer quantum of investment and it being illiquid, investment in this asset class has to be a well-calculated decision. In the current market scenario, there is flexibility in pricing as well as payment schemes, but one must check for any hidden costs.

 

Real estate investments entail a long-time horizon of at least five years and the investor must be clear on the financial implications of stamp duty, registration, GST (in case of under construction properties), prevalent interest rates, tax benefits on interest paid on home loan, tax implications on selling etc.

 

Real estate funds:

 

A relatively new mode of investing is through a managed real estate fund. As these funds invest in multiple projects across geographies, the risk can be diversified vis-à-vis a single property. The minimum investment required to invest in these alternate investment funds is Rs 1 crore with a typical lock in of five to seven years. Before zeroing on any fund, one must evaluate credentials of the fund&rsquos promoters and management, its capability in raising, investing, managing and exiting funds at reasonable returns through their past track record. Evaluation of the fund&rsquos strategy on location, developer partners, project segment - affordable/mid segment housing is as critical. One must evaluate fund managers&rsquo role and control in project execution as active participation ensures timely delivery at optimum cost.

 

Real Estate Investment Trust (Reits)

 

Reits that invest in income generating properties like commercial/retail spaces are likely to be soon listed in India. They require a minimum investment of Rs 2 lakh per investor. Reits generate regular dividend income as well as capital gains, on transfer of Reit units on exchanges. Reit&rsquos returns hinge on rental yields and price appreciation of the units, which would depend on demand supply trends in commercial/retail real estate industry.

 

Thus, there are multiple modes available for investing in real estate today and one should decide on the same basis their risk appetite.

 

ROUTE TO INVEST

 

Physical real estate involves stamp duty, registration, GST and interest on home loan  

 

Real estate fund allows risk-diversification as investment is across multiple projects but ticket size is Rs 1 crore

 

(The author is the Head of Research at ASK Property Investment Advisors. Views and opinions expressed in this article are personal)