Real estate investment in India

WELCOME TO THE WEALTH MANAGEMENT COURSE - SESSION 8S G Raja Sekharan

REAL ESTATE

WHY REAL ESTATE INVESTMENT

Unlike stocks, mutual funds, gold and commodities, the chances of downfall in value of real estate investments is extremely low in India

Investing in property with rentals is the safest way to secure your retirement – properties give you uninterrupted, passive, inflation proof stream of income

Reasonable good research will lead you to real estate investments with CAGR of 15% plus per annum in Indian conditions – only equity gives better returns – but even equity has ups and downs.

In India, real estate investment is akin to a FD that commits 15% returns year over year with almost zero risk.

LEVERAGING YOUR GAINS FROM PROPERTY INVESTMENTS You invest in a flat costing Rs 50 lacs – you put Rs 10 lacs

upfront. The remaining 40 lacs is paid over two years in 8 quarterly installments – which you finance from a bank loan @ 10%.

Over the next two years, you pay pre emi to your bank. Overall outflow from your end over the two years –

1. Rs 10 lacs

2. Total of the pre emi’s over 24 months – Rs 4 lacs appx. At the end of two years the property appreciates by 20% - i.e

Rs 60 lacs and you sell it. What is your ROI? On an investment of 14 lacs, you get a profit of 10 lacs in two

years. ROI is appx 40% over two years - 20% per year. Typically since 2000, in Bangalore, the ROI has been around

30% - 40% per year for such investments.

SUPPOSE YOU DO NOT SELL THE FLAT On delivery, you spend another Rs.10 lacs - interiors(4

lacs), registration taxes(5 lacs) and other costs(1 lac on water, electricity, owners association etc)

Your decide to pay an emi of Rs 45000 ( 14 years loan) and the rent is Rs 12000 per month and it is going up by 10% per year.

After 5 years, the house value goes up by 100% i.e Rs 110 lacs - the overall returns is: Outflow – Rs 60 lacs Pre emi –Rs 4 lacs Emi – Rs 21.6 lacs Rental received – Rs 1.44 +1.58+1.74+1.91+2.10 = 7.77 lacs

At the end of 5th year – your cash returns per annum is 3% (and it is growing by 10% per annum) and capital appreciation is 10% per year on the current value(appx 10 lacs per annum).

AFTER 14 YEARS IN 2025

You have cleared the loan paying Rs 33.1 lacs as interest and 40 lacs as principal over the 14 years.

Your rental income would be around 5.5 lacs per annum in that year ( rental received over 14 years would be 43 lacs)

The value of the house is estimated to be 230 lacs (assuming a conservative 10% appreciation)

So over 14 years, by investing 54 lacs, you create an asset of 230 lacs and also have a perpetual, inflation proof cash inflow of Rs 5.5 lacs per annum.

AFTER 14 YEARS –THE REAL LIFE SITUATION

Chances are that your home loan would have been prepaid by the 5th year.

Your value of the house would have appreciated at more than 10% CAGR - the actual appreciation varies but at a good locations – it doubles in value every 5 years (CAGR of 15%)

Chances are that you would have three such homes in 14 years with two loans prepaid and with an annual income of Rs 15 lacs and asset value of 500 lacs

Chances are that you would be financially independent by then and you would have other assets beyond these three properties

IT IS NOT NECESSARY TO DO EXTRAORDINARY THINGS TO GET EXTRAORDINARY RESULTS.

YOU MUST LEARN FROM EXPERIENCE, BUT YOU MUST LEARN FROM OTHER PEOPLE’S EXPERIENCE WHEN YOU CAN.

INVESTMENT OPTIONS IN REAL ESTATE

Residential properties - flats Landed residential properties – houses with

land Commercial properties –shops /offices Land – commercial/ industrial/ residential Land – agricultural. Real Estate Investment Trust (REIT) Real estate funds Real estate equity


Residential properties – flats

In good locations (most places in Bangalore), flats give 3% rental returns (after 5 years) and a capital appreciation of around 15% per annum (doubling in value in 5 years) – a total return of 18% p.a.

Minimum investment required is Rs 40 lacs - 80% of this can be through loans


Residential properties - flats Landed residential properties – houses with land Houses with land need to be bought with care as

the upfront investment can be very high Trick is to buy in areas where the land values are

low now but will appreciate due to developments around

Typical rentals are 2-3% ( 5 years after purchase) and capital appreciation is 20% plus

Typical investment required is Rs 50 lacs plus - 80% of this can be through loans


Residential properties - flats Landed residential properties – houses with land Commercial properties –shops /offices This is a smart investment option that people miss. Typical investment starts at Rs 15 lacs - 80% of

this can be through loans. Rentals are around 7-10% of the invested amount

from year 2 (as compared to 3% on residential properties)

Capital appreciation is also about 15% per annum Every investment savvy person would most likely

have this in his/her portfolio



land Commercial properties –shops /offices Land – commercial/ industrial/ residential Investment in land must be done after reaching

financial independence. Land investments give no cash flow, are fairly difficult to

exit – but give superior returns - more than 20% per annum.

Typical investment starts at 15 lacs and value doubles every 3 - 5 years.

Lower value land investment start at 5 lacs –but the initial appreciation takes about 5-8 years


Residential properties - flats Landed residential properties – houses with land Commercial properties –shops /offices Land – commercial/ industrial/ residential Land – agricultural. In many states – only farmers can buy agricultural land –

farmers are defined as someone who has agricultural land already and who has a non-agricultural income of less that 2 lacs per annum

If you are qualified to buy these lands –it makes sense to buy agricultural land next to any town, build a farm house and wait for the town to grow to your property in 15 years.


Residential properties - flats Landed residential properties – houses with land Commercial properties –shops /offices Land – commercial/ industrial/ residential Land – agricultural. Agricultural lands near areas of development

give a reasonable capital appreciation – however it completely depends on the location.

DO’S AND DONT’S WHILE INVESTING IN REAL ESTATE Future development potential of the location would define

your ROI. You must use a good local lawyer to look at all the legal

ownership documentation - Khata, tax paid receipts, no encumbrance certificates.

If it is a built property – the documents will also have the local municipal clearances, plan clearances, water, power approvals etc

Ensure that your lawyer is involved in the sale agreement, registration of the agreement and getting the documents converted to your name.

Do not buy the property if the documents are not clean as it will be difficult to sell it later.



land Commercial properties –shops /offices Land – commercial/ industrial/ residential Land – agricultural. Real Estate Investment Trust (REIT) Real estate funds Real estate equity

REAL ESTATE INVESTMENT TRUST Invest Rs 25 lacs over three years in REIT The fund manager invests this capital in large real

estate projects with a specific mandate( geography, segment –residential or commercial or mixed use)

Investment is done in projects at design stage post the land being bought by the developer – relationship with developer is mostly long term and not project to project

Payments to developer are disbursed based on milestones

Returns normally start from 5th year and go on till 8th year.

IRR for these are normally 20% p.a

REAL ESTATE INVESTMENT TRUST -ADVANTAGES The investor gets the upside of real estate without the

large funds required. There is also an assured exit plan The investment risk is spread over a few properties/

locations

Last Price Market Cap.(Rs. cr.)

SalesTurnover

Net Profit Total Assets

DLF 363.60 61,718.62 2,419.21 765.06 25,467.85HDIL 266.20 10,914.31 1,491.99 596.65 11,169.45DB Realty 413.50 10,058.75 - - 3,416.11

Oberoi Realty 290.00 9,518.76 - - -

Indiabulls Real 212.70 8,546.09 33.99 22.45 5,296.28

Prestige Estate

203.70 6,682.86 - - -

Godrej Proper 750.05 5,239.10 - - 1,270.33

Sunteck Realty

694.00 4,369.85 16.38 7.24 394.10

Anant Raj Ind 135.15 3,988.23 286.81 237.17 3,592.33

Sobha Developer

367.85 3,607.28 1,114.00 136.70 3,162.51

REAL ESTATE EQUITY AND REAL ESTATE FOCUSED MUTUAL FUNDS

PLACE OF REAL ESTATE INVESTMENT IN YOUR LONG TERM WEALTH CREATION

As you grow your wealth, you must aim to create real estate cash flows as early as possible.

Smartest people start investing in real estate before marriage when there is adequate cash flows.

I have known one person who had three flats before he got married – today he is 35 years old and is financially independent

And off course he is married.

PLACE OF REAL ESTATE INVESTMENT IN YOUR LONG TERM WEALTH CREATION PLAN

Investment in commercial spaces that gives higher returns and also can come with smaller investments is recommended

Do not invest in real estate with a view to use it. Look at it as an asset that can be used and sold as and when required just like a share or mutual fund.

Invest in real estate assets for meeting your cash flow requirements - by the 10th year, you must have two assets (loan free) which must contribute about 70% of your annual financial requirements.

A FEW TRICKS IN REAL ESTATE INVESTMENT

Befriend a real estate broker – they know the market for properties that are going cheap.

Spend time looking at TOI Sunday edition and visiting locations where there is real estate boom.

If the market is expected to go up and up – book two flats and start paying the installments – with a view to keep one and sell one mid way and move the profits of this sale to your flat.

Most builders have a pre launch booking offer for investors – as they also need money flowing to build – Invest in good properties as a prelaunch investor and these builders would help you sell the property later.

A FEW TRICKS IN REAL ESTATE INVESTMENT

Buy the most premium stuff possible – 4 bedroom vs three bedroom; inside city vs outskirts; branded builder vs a low brand one; property with extensive amenities vs one without

amenities Combine the investments of a few friends and

invest in a real estate asset – this helps in larger overall investments and higher returns per person.

THANK YOU

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Real estate investment in India