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Real Estate as an Investment

, December 4, 2012, 0 Comments

Real Estate Investment

Real estate investment is one of the oldest known classes of investment. Even today, it continues to occupy a majority share in the overall investment portfolio of an Individual.According to Merril Lynch Cap Gemni Wealth Report 2012, Asia-Pacific HNWIs remained most heavily invested in real estate and equities in 2010. Of all HNWI assets, 27% was in real estate, far above the global average of 19%. Another 26% was in equities, significantly lower than the 33% global average.

The objective of any investment decision is to optimize return while managing risk and volatility. While investment in equity has potential of giving higher return, it is fraught with uncertainty (risk) and volatility in prices which could also result in loss of capital. Debt on the other provides relatively lower and predictable returns along with safety of capital

Real estate as an asset class offers the best combination of return and risk. Over the long term, real estate investment in India has delivered higher return than any other asset class. Further, when you invest in real estate, you have the possession and ownership of the physical asset which reduces the risk to a large extent.

Also over the long term, prices of real estate tend to be less volatile compared to equity. It has been established that investment in real estate based on sound research can seldom go wrong.

Another factor in favor if investing in real estate is the possibility of leveraging through mortgage, especially for residential properties. One can avail of home right up to 80% of the property at  relatively lower rate of  interest (around  10%) which can substantially enhance the return on self invested funds.

If one looks at other asset classes like equity, mutual funds, bonds commodities etc. there is wealth of information freely available by way of research reports, news papers and magazines, TV Channels, websites  etc. Also we have highly professional advice and service available from various channels – brokerage houses, fund houses, Banks, wealth managers, private bankers etc. for this segment

But when it comes to real estate, there is hardly any structured or systemic knowledge or information on the subject available to individual investors to enable them to take informed decisions. This despite the fact that investors in India are more interested in knowing about and discussing real estate than any other asset class.

Also there are hardly any organizations offering professional service or advice to individuals investing in real estate. This is despite the fact that almost 50% of the property purchases are for investment purpose.

People investing in real estate by and large rely on their own study which is done by seeing the newspaper ads (which now days are full of property advertisements) visiting the property sites, visiting property exhibitions (which are held frequently by the developers), visiting developers websites and other property related ports etc.

Also it has been observed that when it comes to real estate investment buyers highly rely on tips/recommendations/advice from friends and relatives which very often leads to herd mentality resulting in group buying. Thus in absence of any structured information, decision to invest in real estate is largely influenced by

a) Information provided by the developers through advertisements, websites and property exhibitions etc.
b) Advice/decisions of friends and relatives

This column is an attempt to fill the vacuum of structured information in the real estate space. Our endeavor is to educate the investors on of real estate investments and provide meaningful and relevant information to investors to enable them to take sound investment decisions.

Over the next few months, we will be introducing and discussing various aspects and concepts of real estate investments and also providing you with factual information regarding trends and happenings in this area.






About author
Paresh Karia is a Chartered Accountant with an experience of over 15 years in the banking and financial services sector. His past experience includes working with reputed organizations like HDFC Bank, ICICI Bank and ABN Amro Private Banking. ...more