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Builders & Real Estate Bulls Theory Proved Wrong

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Builders & Real Estate Bulls Theory Proved Wrong

Last updated: November 1 2016
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  • Re : Builders & Real Estate Bulls Theory Proved Wrong

    +1 southsea.
    Baruch, agree about REIT having more impact on commercial rather than residential. It is also because commercial rentals have been much better than residential when compared with their capital value.

    Again, lets take hypothetical question :-

    > In residential RE, how many flats will be bought & then put on rent by REIT ?? What will be rental yield at current capital value ?
    > If they give money to builders via some SPV & if the flats are not affordable to buyers, to whom will builders sell the flats to ?

    As said before, be it bankers or investors (Individuals, REIT or PE), the chain stops with end users & unless end users are in the market, things won't change on ground.
    If you are happy, you are successful.

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    • Re : Builders & Real Estate Bulls Theory Proved Wrong

      Risk of investing most of your money in real estate

      Property, in the form of real estate, a piece of land, or an apartment or house, is considered to be fairly good investment option. Simple investors feel happy and contended when they invest their money in a property and expect it to give them grand returns. They dream that their net worth will shoot up with an appreciation in the price of the property.
      All this is true? Yes and no. It may surprise readers to read the ‘no’ in the answer provided.

      Too much of anything is good for nothing. Do you invest most of your money in real estate? Please read on to understand why you should not invest everything in real estate.

      Liquidity aspect of your property investment:

      Illiquidity of the Property: While it is true that increase in the property valuation does increase the Asset value in the hands of the holder the key issue of liquidity is missing. Investors often are led to believe that they have very good value in their hands through their property, but what is often not realized is that the value is true only when you have it in your hands and not tied up elsewhere.

      When emergency knocks at your door…: Property value more often than not, is tied up with it and is not in its liquid form, which means exiting from a property investment is way more difficult than any other investment option. Money in its liquid form is best at the time of an emergency when cash is required to tide over a crisis. Imagine a situation when you or one of your loved ones is in need of emergency medical treatment, or may be your son or daughter has cracked a difficult entrance examination and has been selected to join a foreign university, money in its liquid form is what you need.

      Trying to arrange for such big amounts at a short notice is well neigh impossible if your entire money is tied up in real estate investments. Worst come worst it could mean the end of a life or an opportunity.

      Illiquidity as a Risk: Asset illiquidity (or lack of liquidity) is an important investment risk and has been the subject of academic research. However, the majority of efforts are directed towards probing the illiquidity of securities, such as stocks and bonds, since they are commonly perceived as highly liquid assets and traded in relatively efficient public markets. However, the “real” illiquid assets, consisting of real estate among others but it has not merited much attention which it deserves. Lack of liquidity in assets is an important source of investment risk.

      Price discovery in Real Estate: Difficulties in buying and selling an asset are often associated with its inherent illiquid nature, by investors. However the extent of such illiquidity is never easy to measure. Trading in real estate is usually a lengthy process and can take weeks, months, even years. Immediate sale of real estate is in most cases next to impossible even for the most cash-strapped owners, and a quick sale usually results in significant discount in price as compared to the property’s fair value. While the high discount may reflect the degree of desperation of the seller, it is not the proper yardstick to measure the trading strategy of sellers who are not constrained by circumstances and can take the time necessary under given market conditions to search until a favorable offer arrives.

      It may also be relevant to state here that a house that takes longer to sell than others can be said to be less liquid. However, since the selling time is also linked to the price at which it was sold, it may not necessarily follow that a quicker sale signifies greater liquidity; on the contrary it could be that the price was set too low.

      Debt aspect
      The debt aspect of home loans is also a recurring draw on the investor’s present and future earnings. Take the example where an investor has bought a house for investment purpose and is paying substantial EMI’s on it, now he requires to sell-off the property but is stuck because the market is not conducive. In such cases the investors could face a lot of hardships as a result of this market condition.

      Expenses and legal aspects
      It also needs to be remembered that a real-estate property comes with a lot of in built expenses like taxes, periodic repairs etc. There are also the legal aspects associated with a property. Any modification to the property which is not approved by the relevant authority like the municipality or corporation board could make one liable to pay penalty and in extreme cases the unauthorized part of the construction would be deemed illegal and pulled down.

      Some more points:
      • Once we invest in a property, we are sentimentally attached to it. We won’t sell it to meet the financial goals of the family.
      • The major gain in these investments will be realized only when you sell. The returns we get in the form of rent are less than 3% of the cost of investment.

      Risk of investing most of your money in real estate - Moneycontrol.com

      ^^ With taxation changed under 54C in this budget, investment in RE becomes even bad for speculators now.
      If you are happy, you are successful.

      Comment


      • Re : Builders & Real Estate Bulls Theory Proved Wrong

        Originally posted by southsea View Post
        @HH - "Yields are equal to rent income from property and not capital appreciation cause to "yield" the capital appreciation one has to sell the asset but the yield is soemthing that one gets while holding onto the asset. "
        I dont understand this statement. Perhaps you could restate it.
        '
        Can MF invest in property?'
        I was saying that financially/tax-wise REIT is not different from MF/ETFs. The underlying asset class is certainly different. [B]
        When one talks about yield its purely the rent, dividend or interest on an asset that one owns. Paper profits are not counted as yield.

        Regarding MF and REIT. Yes there are similar but not the same. MF is used for asset classes that are more global - ETF for Gold or stocks of companies that are global or impacted by global + local trends. REIT (atleast in India) is going to be for RE which is a highly local asset class. No matter what happens in US the property pirces in Hyderabad were driven by the Telangana issue.

        REIT is also different in the fact that it opens up a very very big market that previously required big investments from investors. Now with a 1 lakh investment a person can own a part of nariman or BKC tower and participate in the growth.


        So yields in India RE have been quite low for a long time but that hasnt stopped the bubble from growing.
        1. I think we can say with some certainty that the bubble is not growing now.
        2. If you accept the assertion that 'In general, prices have grown faster than rents over the last 10 or so years', then it is mathematical fact that yields were high 10 years back.
        >It will also be used as an instrument for channeling a lot of savings
        We certainly need more money in financial assets than in barren land or empty apartments. But I am not hopeful about the 'lot' part.
        In any case, these things play out over years.
        The bubble is growing nicely. Go and check the property prices in areas around Pune. Its only on forums like these that people who have been wrong for the last 5-6 yrs are shouting about a burst.
        Last edited by herohiralal; July 16 2014, 12:02 AM.

        Comment


        • Re : Builders & Real Estate Bulls Theory Proved Wrong

          Originally posted by herohiralal View Post
          The bubble is growing nicely. Go and check the property prices in areas around Pune. Its only on forums like these that people who have been wrong for the last 5-6 yrs are shouting about a burst.
          And also see the prices from 2013 to now to get even more clearer picture.
          Btw, hh, I am still waiting for your comments on :-

          http://www.indianrealestateforum.com...340-page2.html

          Post #16.
          If you are happy, you are successful.

          Comment


          • Re : Builders & Real Estate Bulls Theory Proved Wrong

            @HH - "When one talks about yield its purely the rent, dividend or interest on an asset that one owns. Paper profits are not counted as yield."
            That is exactly what I meant too. And Price = current value of all future rents/dividends/interest + terminal value. So price goes up if future rents are expected to rise.

            Go and check the property prices in areas around Pune
            Builders will always try to keep headline rates the same or higher than before. But the discounts during negotiation, free parking, free registration, etc etc is where the rub is. Going by anecdotal info on these threads there is quite a bit of that going around. I am not from Pune, so I will defer to the locals on this.

            Inflation will do the rest, if you care about real price growth. (3-4 years of flat prices at 8% inflation ...)

            Comment


            • Re : Builders & Real Estate Bulls Theory Proved Wrong

              Originally posted by realacres View Post
              And also see the prices from 2013 to now to get even more clearer picture.
              Btw, hh, I am still waiting for your comments on :-

              http://www.indianrealestateforum.com...340-page2.html

              Post #16.
              Here is the details of those changes. People will just invest in NHAI bond. People will just be attracted to REIT now. Falls counter to ur analysis that REIT are of no use

              Selling a House? Tax Changes You Need to Know – NDTV Profit

              Are you going to reply to my post on REIT? Again the whole thing about REIT being -ve for RE is just plain wrong.

              Comment


              • Re : Builders & Real Estate Bulls Theory Proved Wrong

                Yeah so again now know how supportive this govt is to controlling the RE bubble.

                Reserve Bank of India

                Affordable housing is given special status. Start of Indian Sub-Prime. Enjoy the RE bubble. Even RBI is saying 50 lakhs is affordable now. Wow.

                "(ii) Affordable Housing: For the purpose of this circular, lending to affordable housing is defined as housing loans eligible under priority sector lending by the RBI (please see the Appendix and as updated from time to time), and also housing loans to individuals upto Rs. 50 lakhs for houses of values upto Rs. 65 lakhs located in the six metropolitan centres viz. Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad and Rs. 40 lakhs for houses of values upto Rs. 50 lakhs in other centres for purchase/construction of dwelling unit per family. RBI will periodically review the definition of affordable housing on account of inflation."


                "These bonds will be exempted from computation of net demand and time liabilities (NDTL) and would therefore not be subjected to CRR/SLR requirements. However, this exemption will be subject to a ceiling of the eligible credit mentioned in paragraph 7 above. Therefore, DTL for the bank which has issued long term bonds in terms of this circular will be computed as given below:"


                Why not just reduce the interest rate instead? That superstar RBI gov needs to stop following theories that never applied to India and start following policies that will help capital investments and asset creation. This type of lower lending standards will just create a bigger mess.

                Comment


                • Re : Builders & Real Estate Bulls Theory Proved Wrong

                  REITs boost: Pros see $10bn flow into Indian realty sector - Moneycontrol.com

                  Comment


                  • Re : Builders & Real Estate Bulls Theory Proved Wrong

                    REITS and affordable housing initiatives are a big negative for the existing methods of doing business.

                    It is also a big negative for astronomical capital values with negligible yield.

                    Once the REIT is listed - assuming it is listed similar to the REITS listed in US markets - the market will bring the yield equation to realistic levels.

                    REITS are a big negative for the delayed and unrented commercial buildings. Without tenants in place, no professional REIT will look at buying a commercial asset.

                    With the possibility of REITS, retail investors will also stop making so many flat investments and channelise their savings into REITs. This should drive down the flat prices until the yield starts making sense.

                    Existing flats are already in oversupply and will see reduced interest from investors - so the oversupply status will become even worse.

                    REITS can also invest in tenement type residential rental properties once the govt changes the ridiculous tenancy laws. This can drive down the rents further - and capital values will need to fall even further for yields to make sense.

                    The sooner we get REITs, the better.

                    My only hope is that companies like DLF, Unitech, DB Realty and their ilk are prevented from launching REITS. While markets can punish them by tanking their valuation, it is better that REITs start off well with decent management with credibility.

                    Yes there will be a rush of launches. A lot of money will be collected. It is better to wait for a couple of years, see the performance and then only invest in REITs.

                    I remember how the Mutual Funds in their early days were a big hoo haa collecting a lot of money - but they were being run by very poor quality managers. I used to regularly beat mutual fund managers from 2000 to 2007 by a big margin - especially on the way down because they were like traders just buying on tips - buying the flavour of the moment. But in the last few years, mutual fund managers have become much better and I can no longer outperform them and am shifting most equity allocations into MF.

                    REIT should be similar. First few years one should invest only small tracking amounts and study how they are behaving. Big allocations should come later and be into proven ones only.
                    Last edited by Venkytalks; July 16 2014, 04:21 PM.
                    Venky (Please read watch a or before posting)

                    Comment


                    • Re : Builders & Real Estate Bulls Theory Proved Wrong

                      One more point since a lot of discussion on this.

                      What is good for the real estate market is not necessarily good for an already invested flat investor i.e. price appreciation.

                      REITS are good for the market as a whole. They are a good way for us normal people to allocate funds to real estate without moving from armchair. The daily price volatility is good for price discovery - since you and I will determine the price of the REIT by trading in it.

                      REITS are really bad for the existing way of doing business and for existing investors in flats or other types of real estate.

                      The better the price discovery, the more the competition, the more real estate prices will alighn themselves with current yields. Money for good companies with good execution and good professionalism will be available.

                      At the same time, the poor quality builders will see their financing dry up. Currently they entrap buyers with lower initial prices and once trapped they screw them with delayed executions, poor quality and no renters. They will find it difficult to do this with REITS. Once the market finds out that a REIT has made a poor investment, that REIT will be punished, value beaten down and never again will anybody trust these bad quality REITS.

                      Look at DLF and Unitech share price. The same will happen to the bad REITs. Whereas the good REITS will do well like the Prestige Estates of the world.

                      So yes, I would welcome REITs, will invest in them and never again will I ever buy physical property I dont need for self use - a lot os other real estate investors will be thinking the same thing and so REITS are a huge negative for the currently overpriced properties.
                      Venky (Please read watch a or before posting)

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