By: Amit Bhagat, MD & CEO, ASK Property Investment Advisors
Track2Realty Exclusive: In the current scenario, investment in Real estate sector has been a challenging task due to complexity of the real estate markets in various cities. The complexity has evolved as a result of local planning regulations, social and demographic features, economic profile and legacy issues.
This is further compounded by the macro-economic factors like interest rates, credit regulations, economic/income growth and resulting affordability as well as tax considerations.
However, the most important task of selecting the right segment, project and right developer pose a challenge given the localised nature of the industry. Real Estate PE funds are most competent to address the above complexities due to their experience in real estate investment, construction/asset management and risk management.
Conventionally investors have been addressing these issues partially. One is most likely to invest in a city where one resides. This leads to concentration of all investments in one market which is not a prudent investment practise. For instance this risk is being more appreciated by investors in Hyderabad due to current socio-political crisis prevailing in the state.
The investor may not be in a position to identify growth corridors that could offer superior risk adjusted returns. A growth corridor can be described as emerging location in a city with better infrastructure and job creation opportunities.
In addition to concentration risk, direct investments brings with itself higher percentage of transaction cost through stamp duty/registration. These transaction costs necessitate a higher appreciation before any return is earned.
For instance, an investment of Rs 5000 per sq ft should become Rs 10,500 per sq ft to absorb stamp duty/registration cost of Rs 500 per sq ft and balance Rs 5000 per sq ft will offer 26% IRR (Internal rate of return) over 3 year period provided entire payment has been made upfront.
…..to be continued
