Different modes for investing in real estate

In India,  one can invest in real estate through following types of properties/assets :   residential property ,  commercial property ,   land ,   real estate (Private Equity)  funds . We would be discussing  each of the above investment class of investments, in detail, over the next few weeks.A.      Investment in Residential  propertyBuying a residential property is one of the most popular means of investing in real estate. This is mainly because of variety of options available to investors to suit their budget, location preference, risk appetite and investment horizon. Also the ease of understanding the transaction and executing the same makes it a preferred investment for majority of investors. Residential properties would include low cost budget apartments to high end luxury apartments, independent or attached villas, row houses, plots in gated community etc.

The best way of evaluating proposals or options of investing in residential property would by linking it to the life cycle of the property in terms of construction stage. Construction of any residential property involves the following:

1) Identifying and acquiring land

2) Getting a clear title to the land

3) Getting the requisite approvals from various authorities – Environment Ministry, Housing Body etc.

4) Clearing/Rehabilitating the Slums/Tenants (in case  of redevelopment projects which are very popular in Mumbai)

5) Getting the plans approved from the Municipal Authorities – IOD, CC etc.

6) Getting the project approved for Home Loan by banks/financial institutions

7) Launch of the Project and commencement of construction

8) Completing the construction

9) Getting the Occupancy Certificate

Based on above, investment options can be classified into following categories:

1) Pre Launch (much before the receiving the approvals)

2) Soft Launch (just before receiving the approvals)

3) Launch (on receipt of approvals)

4) Under construction property

5) Ready to occupy property

1)  Pre Launch  

As the name suggests, in this case, investment is done in a property at a very early stage even before the approvals are in place. The developer makes offer to the investors at very attractive rates in order to raise funds to finance the cost involved during the pre construction stage.

Generally, these offers are not made public but are made only to select investors who are known to developer or to large seasoned investors who are looking for higher returns and understand the risk involved in the business. At this stage, the developer has only the preliminary plans, based on which the investors have to make the investment decision.

The time gap between the pre launch and official launch could be around 6 months to 1 year or even more. Such investments carry higher amount of risk due to the high level of uncertainty involved in terms of land title, approvals, construction etc.

Hence, such investment could be classified as high risk very high return investment. In the best case scenario, one can get return of over 50%. In worst case scenario, the project may not take off for a long period of time and initial investment may get stuck.

One of the most important factors to be considered in such investments is the reputation and track record of the developer. Many times, projects get delayed due to reasons beyond the control of the developer like change in regulations, environment clearance etc. In such case, generally the reputed builders return back the money to the investors with interest.

Given the nature of investment, access to such offers is restricted and is generally available to the inner circle of investors know to the developers or their channel partners/brokers.

Such offers are quite common in Mumbai and NCR which have large investor base.

2) Soft Launch  

This is one of the very popular forms of investing in residential property, especially for retail investors. Generally, this offer is made at a stage where builder has acquired clear title to land and approvals are at advanced stage. The builder is fairly confident of receipt of approvals and therefore goes ahead with a soft launch of the project.

Apart from raising finance to commence construction, the objective of such launch is to test the market for an acceptable price for the project on proper launch. Many times such offers are made to create hype in the market for the project before its official launch.

During soft launch, the developer initially offers the units at very attractive price (say 20% to 30% discount to the prevailing marketing) on first come first serve basis. This price will be applicable for a certain no. of days (say first 2 days) or units (say first 100 apartments).

Due to such limitations, the developer along with its channel partners/brokers is able to create a buzz in the market about the project and attract a lot of investors, many of whom ultimately end up investing. After the initial offer, the developer may close the booking or increase the price.

It is less risky to invest in soft launch compared to pre launch, especially if it is from a reputed developer, as there is more certainty with regard to the launch of the project. Such investments could be classified as medium risk high return investments.

However, many times, in such offers, there is a lock-in clause, whereby the investor cannot sell the property up to a certain period of time (say 2 or 3 years) or till possession.

The most important factor in such investments is access to information and quick decision since the initial offer price is available for limited no. of days or units. Many investors invest is such project, even without seeing the location,  based mainly on the reputation and track record of the developer and/or their past experience of dealing with him.

Such offers are very popular all across the country and are available from all the leading developers through their channel partners/brokers.