Increasing urbanization which is likely toencompass two out of every five Indians, a marked shift in lifestyle from necessity to comfort and luxury as the primary drivers ofspending, growth in the services sector contributing to affluent middle class in India,conducive fiscal regime ensuring economical home loans with commensurate tax breaks for the end users which in turn allowing an individual to own a house even at the age of 27 today is sure to provide the required impetus to the real estate sector. By virtue of the inherent need for ownership in an increasingly affluent society real estate will see an exponential growth.
Increased impetus on infrastructure development across the country, innovative growth models like Special Economic Zones, impetus on logistics infrastructure to boost local industry with private sector and FDI participations will only add to the glitter of the real estate sector. With real estate funds willing to partner with high net worth individuals to create capital than the more traditional institutional funding route, thissegment opens attractive investment avenues for a suave investor.
Real Estate investments that are traditionally driven by individual initiatives are now being packaged as a standard financial product by realty funds. No more botherations to fix bathrooms in leased out flats; no more fears of encroachment on lands, all you will possess now is a “statement of accounts“ with no maintenance to maximize value.
By virtue of providing an organized and sustained source of funds with relevant sectoral expertise to a hitherto unorganized market in India, funds will captain the growth of realestate industry in its lifecycle to maturity, from the present stage of infancy.
Any individual who would have dabbled with real estate would vouch for the inconvenience of title search of land. He would have certainly come across unscrupulous developers who seldom deliver even after being paid. Such situations get addressedwith a real estate fund at the helm, as they join hands with developersof repute with a clear track record ascertained by stringent due diligence.
Funds go a step ahead in making developers out of investors. As a fund, the investments in any project are at infancy during early stages of the project. The fund investors collaborate with the developers/land owners from inception to completion of the project. This ensures that the average returns in real estate development are at parwith the returns that a developer would earn, which can be attractive on an annuliased basis.
Funds come with an inherent understanding of the business which helps them to identify sectoral gaps in the broader real estate development of any city. This results in more focused deployment avenues which on the one hand maximize returns for investors and on the other help in the holistic development of cities.
The downside in these transactions is also minimized on account of entry at land stage which itself has inherent value equivalent to the investment without discounting future earning potential. Further, a typical investment by a fund offers the potential forstaggered investments at land acquisition stage of the project and leveraging at the construction phase. The net impact of staggered payments and leveraging is a substantially lower equity infusion in projects and hence results in a higher return on equity for the funds and for its investors. And all this, without any speculations on future pnces.
Further, given the spread of investments made possible with the higher investment corpus created from a pool of investors, the fund capitalizes on both the early moveradvantage across various geographies and segments as well as reaps the benefits ofeconomies of scale in the implementation/construction stage of its various investments projects. The added benefits of holding real estate companies to reach as size suitable for listing provides a huge windfall in the stock marketsto enhance the earnings from the business itself is a virtue that comes withinvestments through real estate funds.
Real Estate is a versatile investment instrument where one can expect capital appreciation in the medium to long term coupled with the potential to earn sustained dividend yields on a sustainable basis.
In essence, real estate venture capital funds help to reduce the risk profile of real estate investments by offering diversified investment portfolio managed by experienced fund managers thereby providing dual benefits of a defensive investment alternative compared to direct real estate investments and a hedge mechanism to equity market exposures by offering an alternative asset.
The over-supply scenario that 2008 had witnessed in the commercial real estate space could well continue in 2009, says the annual yearend report by Cushman & Wakefield, real estate services firm.
While some companies, which had committed to larger spaces earlier, have scaled down their absorption as a prudent step to mitigate the cost on real estate. Others, which had taken up space based on anticipated expansion plans, are considering sub-leasing the excess space.
“With this trend continuing coupled with the proposed additional supply and the already existing increasing vacancy levels, the overall supply situation is likely to see no early respite. Hence, rental corrections across micro-markets seem probable over the short term,” says Mr Kaustuv Roy, Director of Tenant Strategies and Solution at Cushman &Wakefield.
The south, central and select suburban locations of Mumbai witnessed rental correction over a year and more recently, Thane Belapur Road (IT) and Malad (non-IT) too recorded a southward movement. Vashi and the non IT proj ects in Thane Belapur Road recorded a stabletrend. Central and Suburban locations of Lower Parel, Bandra Kurla,Andheri and Powai are likely to witness a further fall in rentals with all other major markets expected to stabilize.
In Bangalore, the rental market continued to strengthen recording 4-9 per cent annual appreciation in the peripheral locations and nearly 18 per cent year-on-yeargrowth in the CBD and off CBD regions. Outer Ring Road and the suburban areas arelikely to strengthen further in the coming months, whereas ITPL, Whitefield and Electronics City are expected to stabilize, says the report.
Chennai witnessed a drop of 5- 10 per cent in rental in the CBD and off-CBD locations of T.Nagar, Alwarpet, Anna Salai and Radhakrishan Salai, while the suburbanand peripheral regions witnessed a 7 -9 per cent drop.
Rajiv Gandhi Salai in the peripheries is the only market in the city that has begun toshow signs of stabilization and is likely to continue with the trend as all other major micro markets are anticipated to record a further fall in rentals, adds the report.