W Power 2024

Keep Your Feet on the Ground

If you are not looking for quick, extraordinary profits, the real estate sector still has plenty of investment opportunities. Play for steady returns and prepare for the paperless era

Published: Jan 21, 2010 08:32:31 AM IST
Updated: Jan 20, 2010 04:57:30 PM IST

Ved Prakash Arya,  CEO & Managing Director, Milestone Group.
His call: The property market has a lot of life left, but only in parts. Avoid segments where there is overcapacity or hype.
His Big Picks: Mumbai at the premium end; Chennai, Bangalore and Hyderabad among big cities; Nashik, Jaipur and Coimbatore among emerging cities.

In the last few months, high net worth individuals have pumped in huge sums of money into real estate. Why now? Because HNIs understand that under the present circumstances, it offers the best combination of the right asset class, right timing and right price.

My investment philosophy is based on the fact that one should always target steady return rather than speculative return. This sector will never give speculative, over-the-counter returns which a stock is capable of giving. This sector is not about tips. Property is an illiquid asset that needs nurturing for four, five, six years. Property prices won’t double up overnight; if they do, then the fall would also be equally spectacular. Real estate is meant for systematic, long-term returns.

Today, if you see a good building and think its price will go up in the future, you have no way of investing in a part of it with your available funds, just like you would buy a share of Hindustan Unilever. But time will come soon when such buildings become available as real estate mutual funds. That will attract several new investors to the sector.

When that happens, an investor can easily set aside 20-25 percent in his asset allocation for real estate. So, the first megatrend I see in real estate is that this sector will become transparent and paperless.

The inherent demand for housing will continue for years. The mortgage rate in India is just 5-6 percent of GDP. In developed countries, it is 65-70 percent. So, there is a lot of growth still left.

Now let us look at the opportunities in various segments of the real estate sector.

I don’t see any hope for IT parks in the next three to four years. There is excess capacity everywhere and nobody to occupy. It will take at least three to four years to absorb the existing capacity. And then there are the shopping malls. There, retailers had agreed to pay high rents thinking they would be able to charge their customers higher or will be able to list their companies. But those assumptions have not come true. So, the fundamentals of the business have been broken there.

So, don’t invest in empty IT Parks and shopping malls, at any price. If you do want to invest in IT parks, look at those that already have long-term tenants.

The office sector is good, even now.  But at a reasonable price. The office property market is primarily a six- or seven-city market. As of now, there is some over-supply. But deals have begun to happen and the supply is slowly getting absorbed. The fundamentals are sound.

The Rising Star
The warehouses sector is seeing big change. There is no national player in the sector which is dominated by unorganised players. So the country needs logisticis parks, which will be more efficient. And there lies the opportunity for the investors.

Warehouses are an out-of-the-city opportunity and can yield rentals of about 15 percent on the capital. And as a city grows and the land becomes part of the city, there is immense opportunity for capital appreciation too. So investors should look for companies and funds investing into warehouses.
If you own a parcel of land outside the city, look for developing it into a warehouse. A godown can be as small as 20,000 square feet.  Logistics companies want to be asset-light and will lap it up.

Now, let us look at the real estate scenario in various cities and examine their investment potential.

Mumbai
The Mumbai market is very special. It is the city that offers unparalleled economic opportunity to people. So, there is a natural traffic towards Mumbai and that will continue. Availability of space will always be a question mark and prices will keep going up.

From downtown Mumbai to Kandivali and in fact any part within the city limits will not see prices going down. The western and central suburbs like Borivali, Thane, Kalyan and Virar will see prices stabilising.

In Navi Mumbai, we should distinguish between two parts: One is the evolved areas of Navi Mumbai, which have already seen growth and which will continue to get a premium. The other is Khargar. With the possibility of an airport coming in the vicinity, people have already started investing in Khargar. Today, it may look like a ghost city but it is the next centre for growth.

Delhi
On Delhi, I will be cautious. All the growth has come from the nodes which are in other states. Central Delhi, itself, has not improvised. But these nodes have already developed well and so I don’t a huge multiplication in returns there. The supply is humongous.


Southern Beauties
I like all the three major cities of the South. All offer very good opportunity for the investor, especially on the residential side. I would put Chennai first on the list, Bangalore second and Hyderabad last, but all the three offer excellent possibility of capital appreciation. Prices are still reasonable and can meet your minimum expectation of returns. In terms of economic opportunity too, they are doing well. For instance, Chennai has become a hub for the automobile sector. So, in some senses, these cities represent Mumbai.

Even the office segment in the three cities is good. But the point to note here is that rentals are very low. I don’t think there is any property that can go for a rent of Rs.60 per square foot per month in any of these cities. If any tenant has agreed to a higher rent, rest assured he is going to come back for renegotiation.

 mg_17532_real_estate_big_280x210.jpg

Illustration: Abhijeet Kini

Kolkata
The residential market is good for lower- to middle-income group but make sure you go with a well settled local developer only. Real estate is a city-based activity, not a national activity. Unless, the developer has a very nuanced understanding of the local market, he will find the execution very difficult.

In Kolkata, however, opportunities are limited. While I see constant improvement in all southern cities, I don’t see that in Kolkata. There is no improvement there. Nothing has changed.

Pune
Whatever this city has gained, it is because of its proximity to Mumbai. Pune is a hyped up city. Prices are higher than what they should be for both residential and commercial. This city is also growing in all directions and people are not moving in at that high speed. The city is dependent on the information technology sector; its future is linked to IT. So, one has to be very, very cautious if one is looking for high appreciation.

Smaller Cities
I also see several smaller cities emerging.  Among them, Nashik has a very good potential. This city, along with Mumbai and Pune, is forming a triangle. Nashik is like a suburban area of Mumbai. Companies are migrating there, creating low-end jobs.

Similarly, Jaipur is developing very well. This city is like an extension of Delhi. No other city in the North has better infrastructure or better connectivity.

The same thing goes for Mysore, which is near Bangalore. I also see Coimbatore and Madurai developing in Tamil Nadu. Coimbatore is becoming a hub for five industrial towns around it. It is a city which has all the amenities of Chennai and no hassles of Chennai. Madurai, too, will be noticed for industrial activity very soon.

Ahmedabad is another city that has a great future. It is trying to develop as the second financial hub of India. It is just one hour by flight from Mumbai and the government is investing heavily in its growth.
The only thing to remember is these are secondary cities. Returns are not commensurate with those from major cities. These are very long-term markets and are highly illiquid. It is not easy to sell off your investment and make an exit.

Let us look at how an investor should approach real estate. Never consider your first home to be an investment. First get your own house to live in. After you have bought your first house, if you have surplus income, then look for investment.

Even there, go for paperless investments where you don’t have to own the physical property. Today, there are 20-25 venture funds that give you that opportunity but they are illiquid. Soon, Real Estate mutual funds will come and they will come with liquidity also.

Second, if you already own real estate, don’t keep it idle. Generate some returns. If you don’t, its value will come down and it will not be a good investment.

Real estate is an investment for 15-25 percent annual returns. If you expect to double your investment every year, you are bound to lose.

And beware, when you book a property, plan for taking delivery. It is a dangerous game to invest with just Rs. 5 lakh in hand and without tying up your funds. If the market falls, you will neither be able to sell it off nor be able to raise the money.

Also, don’t borrow and invest. Real estate is not for speculation. It is an illquid asset but your loan repayments are recurring. If the asset takes longer to appreciate, your financial projections will go awry.

If you have already invested in real estate, stay with your investment. Unless you bought the property at the peak of the market, expecting it to double every year. In that case, cut your losses and run. That expectation is not going to be met.

( As told to S. Srinivasan)

 

(This story appears in the 22 January, 2010 issue of Forbes India. To visit our Archives, click here.)

Post Your Comment
Required
Required, will not be published
All comments are moderated