Wish to share one of the article on Realty as an investment option.

Online at http://www.hdfcindia.com/e-newsletter/newsletter_Final.htm
Reproduced below :

Real estate dreams have a strong foundation?

By :Arundhati Bakshi-Dighe
Publication: Economic Times


Thirty four-year-old real estate broker Ram Prasad Padhi does not believe in the booming stock markets, “Just a piece of paper,” he says dismissing share certificates. He likes investments that “one can see”.

He likes real estate. He likes it not because he made a 20 per cent profit in just over a year from a Borivili project, but because, though he paid money in installments to buy, when he sold, he got a lump sum return.

Padhi looks at real estate as an investment opportunity, while for most people, it is a one time transaction - when they buy their homes. Real estate is a great investment option for, not only does it have the potential to make a profit over time, but while the investment matures, it gives inflation-linked returns, in the form of rent. Like all other investment options, real estate can be a great way to grow your money if you know how. Here are four things to build into your investment decision.

Do you have the risk-appetite to invest in property? Property investing is not for everybody. It demands a high entry price, suffers from lack of liquidity and an uncertain gestation period. The minimum investment, even for a small commercial property in an upcoming area, is likely to be a few lakhs. This investment is also illiquid, you can sell a few units of a mutual fund investment without disturbing the entire amount if you need some funds, but it is impossible to sell, say a room, out of a property bought. How long the investment will take to mature, too, is uncertain. You could strike a gold mine, like people who bought into the Delhi suburbs in the early 1990s did, or you could buy during a boom and lose money. More important than all these, is the risk of being sold a dud. Property titles in India are usually not clear and people have been sold houses that did not belong to the seller. To take such a big-ticket risk is not feasible for the average person. “The entry cost, the levels of liquidity desired by the investor, the gestation period in mind, the cost incurred for monitoring the deal and for legal advice are all very important factors in a property deal,” advises Anuj Puri, Managing Director, Chesterton Meghraj Property Consultants.

Choose your location “The concrete and the cement that go into building a house are all visible investments that I make” says real estate advocate Ram Prasad Padhi If you do have the risk-appetite for property, then the most important thing to consider is the location of the investment. First, choose the city since real estate returns show significant variations between markets. Says

B Srinivas, National Manager (Financial Services Group), Cushman and Wakefield: “Real estate investment in the mature markets like Mumbai and Delhi would have yielded a stable 9 per cent to 11 per cent gross over the past 3 years, while emerging markets like Bangalore and Hyderabad have given between 12 and 16 per cent”.

Next choose between residential and commercial property. “Capital appreciation on residential property can be as high as 10 per cent per year compared to five per cent in commercial property,” says Puri. Then choose the area. Find out how the area has developed in the past few years. Also try and find out what the area will look like in future. For example, property rates along the Metro Rail in Delhi and those near the fly-overs in Mumbai may appreciate faster than other areas. Or property rates along the Golden Quadrilateral may rise faster than along other new highways. Now, choose a developer since areas which have good developers working on projects are always attractive.

Advice from Niranjan Hiranandani, Managing Director of the Rs 200 crore Hiranandani Constructions Group. You cannot buy a property one day and then sell it off the very next day. It is always advisable to keep enough money in the bank which can be used for immediate and urgent needs. Property investment should be done by persons who have deeper pockets and longer-term view of their investments. From a long-term financial-returns perspective, it is advisable to invest in higher-grade commercial properties. However, for small-sized investments (upto Rs 5 crore), it may be better to analyse prime residential developments. Calculate the yieldYou need to find out if the money you invest in property is better off in an alternate investment. For this you calculate the yield, that is nothing but the rent the property will get, divided by the market value of the property. Suppose a Rs 30 lakh property is giving a rent of Rs 12,000 a month or Rs 1.44 lakh per year. You are getting a yield of 4.8 per cent (Rs 1.44 lakh/Rs 30 lakh). However, RBI bonds give tax-free returns of 6.5 per cent. So you may be better off in risk-free RBI bonds purely in terms of annual return, if you do not take into account the future potential of the property to gain in value.

Do the due diligence For such a large ticket investment, you need a big-bang due diligence. Plenty can go wrong in a property deal and there are enough stories of people being sold houses that were sold simultaneously to ten other buyers. The antiquated legal system, of course, is of no help to sort out these problems. Examine the profile of the real estate developer and his experience in the local property market. Check the ownership of the property. “Check that the property is not involved in some public interest litigation or any environment related litigations,” advises Puri.

Remember that property has the potential to give great returns, but it has a high-risk tag attached to it too. But for land-lubbers like Padhi, property is the way to great returns. “'Land is always scarce, land is diminishing, but demand is growing,” says Padhi, as he picks up the latest issue of a property paper trying to decide his next buy.
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