A Slice of Property on Paper

Reenita Malhotra Hora explores alternate ways to invest in the real estate market

Gargi Mehta (name changed) had heard a lot about the booming property market in Mumbai. She decided that she wanted a piece of the pie. She was not interested in a place to live, but was eyeing property purely as an investment. But when she got down to speaking with real estate brokers, the young accountant realized that, with her savings, she would barely be able to afford a bedroom, not a full apartment.

Indeed, while investing in real estate might appeal to the aspiring Indian, it can be an incredibly expensive exercise. You are lucky if you can call yourself a homeowner in a crowded, expensive metropolis. If the real estate trend of the last 18 months is an indicator, it is not clear when we will see a correction. That�s great news for existing homeowners but what about those who do not yet have their foot in the door?

Don�t be alarmed. You can actually reap the benefits of the growing real estate market without actually buying property. Though, if you are a non-resident Indian, some options may not be available to you.

Realty funds and securities

The last couple of years have brought in a variety of real estate investment vehicles, including real estate funds and real estate securities. Real estate securities are fairly simple to understand. These are shares of real estate companies that you can purchase in the public market just as you purchase other stocks.

Real estate funds, on the other hand, give you the opportunity to actually investment in a portion of real estate without buying land outright. What�s the advantage? If you set out to buy a piece of property, there is a long list of due diligence that you are required to do-legal checks, title search and rent ability if you are looking to make rental income on it. The beauty of investing in a real estate fund lies in that someone else has already done all of the due diligence.

So, how does a real estate fund work? In the initial stage, land is acquired and aggregated by developers. At this time a financier will create a special purpose vehicle (SPV) that typically holds the property during the time it is developed. The shareholding of the SPV is typically split between the financer and the developer. The financier then sells securities in the fund to investors. The land itself can be developed in a variety of ways. It might include, for example, residential activities (houses, apartments), commercial activities (offices, manufacturing facilities, IT parks), hospitality services (hotels) and retail opportunities (shopping malls).

Increasingly, developers are building projects that comprise some mix of the above since all four avenues show great promise of increase: housing is a priority of the government�s agenda; the growth of the information technology (IT) and business process outsourcing (BPO) industries has led to a need for commercial real estate ; the growing hotel industry has created a need for real estate ; the entry of global brands into the Indian market has translated to the need for more retail outlets.

But as we know, it is easier said than done to individually invest in these kinds of properties. Besides, if you buy a piece of property outright, the price you pay encapsulates the value of the land, the cost to build it and the subsequent gain in value of the property. However by investing in a development fund at the start, you make a saving as you pay for the land and the actual construction cost only.

Building up wealth

You should be forewarned that real estate investments are not very liquid. Be prepared to keep your money in the fund for say six-eight years. Why? Because you need to wait out the time it takes to actually develop the property. But there is good news: in the last year, the rate of return on real estate has been a whopping 50-60%.

Arjun Gupta, a consultant with an investment firm, Client Associates, suggests, however, that since there is no actual index, it is wiser to make an assessment by looking at historical rate of return. By this he means looking back to the rate of property increase over the last 20 to 40 years-a good 15-20% per annum. So although you can purchase real estate in any part of the world, chances are that if you purchase here, in India, you can do quite well. But of course, remember, that past performance is no guaranty of future returns.

Your Options

Real estate funds are a relatively new phenomenon in the Indian investment universe. According to Gupta, the first fund was floated as recently as 2005. Today companies like his offer clients an array of 10-15 different funds for investing in real estate , such as those floated by HDFC, Urban Infrastructure and Unitech India, to name a few. Many of these funds include a diverse portfolio of different kinds of real estate , sometimes spread out over a number of different metros.

The veteran player HDFC (Housing Finance Development Corporation) provides HI-REF, a closed-ended seven-year fund that was floated recently. You can invest in this-and some other funds-in installments, which is a big advantage. Satish Kataria of Indiareit tells us that Primal Enterprises released its first fund in 2006 to build out an interesting mix of residential property, commercial property and IT parks throughout Hyderabad, Chennai, Bangalore, Pune and Mumbai. This particular fund attracted around 400 investors. So if you would like to participate in India�s real estate boom, you might want to check with your investment advisor about the various investment opportunities that exist. To be a real estate magnate was once a distant dream for most Indians. Today it can actually be a reality!