In a market slowed down by the soaring interest rates and with the speculators taking a back seat, developers are out to woo end users with affordable property options. “Many developers across different cities are providing opportunity to buyers to book low value apartments by simply putting in seed money and getting it leveraged through the bank with option to pay EMI only after possession. Since the developer and the bank absorb the interest component until possession, it offers excellent returns for small investors as the rental values after possession can offset the EMI.The investor also has the option to exit after possession and gain a high ROI (return on investment) as only outlay is the seed capital”, says Vaibhav Dhingra, Executive Director, SAR Investments.
Small investors can today leverage the realty boom by investing in tier 2&3 Cities. These small ticket investments in land serviced apartments, budget homes can fetch good returns over longer period. Not just that through group investments, small investors can leverage high investment opportunities in malls and commercial offices for high returns.
Investing in land
Investment in land is always a good proposition both in terms of good appreciation and its high liquidity, Land values have known to double in one year. And now with the real estate boom in smaller cities and distant suburbs, investment in land has became all the more attractive. Especially small investors can get rich dividends with a meagre investment of Rs. 5-10 lakhs. According to Investment Expert, Lakhotia, the concept of group investment can be well implemented in agricultural land. “I would suggest that for big returns, the investment in cheap agricultural land is one good option.”
Haarsh Roongta, Director, Apnaloan.com advises that one should buy land in remote outskirts of larger cities or in the suburbs of upcoming smaller urban centers with a time horizon of 5-10 years for better returns. “One should also consider the connectivity and infrastructural aspects besides ownership and zoning issues.”
In the wake of the IT and tourism boom, the concept of service apartments has caught up in both metros and non-metro cities. And with developers offering investors a chance to buy service apartments with the lure of earning attractive returns by way of rentals, service apartments have emerged as an attractive investment option. “It makes a lot of sense for investors to buy service apartments since with the booming demand, they are guarnteed good returns on their investment” , says Atul Goel of Goel Ganga Developers whose project Ganga Collidium at Pune offered a similar option.
Leading real estate developer of Kochi, Gokulam Venugopal of Gokulum Engineers adds that investing in service apartments is a good oppourtunity for small investors looking at good returns. “One needs an initial investment of just about Rs. 2.5 lakh for a Rs. 20 lakh 1 BHK unit and the balance could be serviced through a loan.”, he says
With a small initial investment of just about Rs. 2-3 lakh and the EMIs for the balance payment taken care of by the rental scheme offered by the developer, it makes a sound sense to invest in service apartments.
Another trend that is beginning to catch up is a joint venture development on small plots. If a person can only afford a plot and does not have resources to build a home, he can enter into an agreement with an investor to fund the construction. The investor can build a double storey home with a separate entrance and parking space. Both will have equal rights and can even sell it to the third party. Even two friends or office colleagues can buy a plot of land with collective investment and then construct the double storeyed home with shared funds. Infact realtors like Bangalore-based Farook Mahmood, President, Bangalore Realtors Association of India are already advising small investors to go for joint ventures.
Says Farook , “The access to finance too will be relatively easy as the regular home loan is what they need. The fact that they can be co-borrowers will entitle them to a higher amount too. They can get the funds against the security of the building. This makes it possible for people to stay in the heart of the city or at prime locations at a relatively low cost. In tier 2-3 cities or in suburb of big cities, people can own a 2-bedroom home within Rs. 10 lakhs. Obviously this would be a good proposition from investment point of view as well. All this however requires plenty of financial and legal documentation and issues such as undivided interest in land need to be addressed in detail. ”
Group investment
Group Investment is a real money-spinner in real estate, particularly for the small and medium investor who would like to have good earnings, making most of the ongoing real estate boom.
While a small individual investor can get the benefit of the collective strength of investors by way of higher bargaining power, special care needs to be taken to ensure flawless working. Advises Lakhotia, “For group investments, the best option is to form Association of Persons (AoP) followed by the choice of partnership. It will then work like an organized mutual fund which aims at providing the benefit of real estate investment to its co-owners.”
Office property and malls
The concept of group investment in commercial office complexes is catching on. Recently a group of 20 individual investors picked up 20000 sqft of floor space in a tech park in Whitefield, Bangalore through Silverline Realty. The developers sold the group undivided space in the tech park with the condition that they should not demarcate the space with walls and the entire floor space had to be leased out to a single tenant. The undivided interest in the land was registered in the name of the owners, giving them the right to ownership. The tenant, an MNC who took up the space, did not want to deal with 20 different individuals. The company asked the developer to enter into a tripartite agreement where the developer did the interiors and the owners leased out the space to the tenant. The developers undertook to collect rent and pass it on to the individual investors after deducting taxes. “The return on such investments if the investors themselves do the interiors is about 18 percent. The return on the premises will be around 9.5 percent. This is assuming the bare shell is let out with a 12-15 month interest free refundable deposit” , says Farook Mahmood, MD, Silverline Realty.
Real estate investment in malls is on the upswing due to double- digit return. But since retail space in these malls is quite expensive, it’s beyond the reach of a small investor. But a good size shop costing not less than Rs. 50 lakh can be jointly bought by 6-8 friends/ colleagues. “The group of small investors will be the co-owners. In case the shop is let out even then it is possible for each co-owner to separately show income in the income-tax return as a co-owner of the mall shop ”, says Lakhotia.
Holiday home
Why go in for investment in a time share resort when you can try out your own innovative time share concept with a small investment of Rs. 2-5 lakhs. One can explore the possibilities of buying a small cottage in a hill station or a holiday destination jointly with a small group of friends and relatives. “The biggest advantage of this in comparison to buying a time share in a company is that as an investor you get more liquidity for your investment in addition to the benefits of property appreciation. Besides, you do not have to pay yearly maintenance charges and need to spend only actual charges for its upkeep. The best part of this concept is that after a couple of years the property can be sold with appreciation and one can move on to other destination. ”, explains Lakhotia.
Paying guest/ Hostel accommodation
The concept of paying guest is fast picking up not just in metros but also in tier 2&3 cities assuring good rental income. A group of 10-12 friends with small individual investments can buy an apartment/ home for paying guest purposes. One of the co-owners on rotational basis can be entrusted with the responsibility of managing the house. So, in this manner, with small investment one can get big returns both in terms of rental income and property appreciation.
Similarly with an individual investment of Rs. 3-5 lakh, a group of investors can buy a property for setting up a hostel for students, which can be managed jointly.
“If you want to reap the full benefits of this type of investment, then the property should be bought close to the educational institution”, advises Lakhotia.
Country cottage/ Farm house
Small investment of Rs. 5-10 lakhs in a country cottage can fetch you good returns. About 5-10 friends can jointly buy agricultural land in the city suburbs outside the controlled area to construct independent small cottages with a common garden to sit , play or even host parties. “Such a small investment would ideally double in just one year. We can make it happen for a group of investors ”, says Lakhotia who has been even helping the investors implement the theme of common Farm house. A few years back a group of 40 persons with a meagre investment of Rs. 31,000 each was helped by Lakhotia to become proud co-owners of a country farm house near Faridabad, complete with a mini swimming pool, lawns and children rides. After enjoying the farmhouse living for a couple of years, they sold it off with each of the investors getting double the amount. “Even today with an investment of Rs. 2-4 lakh one can go in for a common farm house that can get handsome returns in the coming years”, says Lakhotia.
With the Real Estate Mutual Funds (REMFs) or Real Estate Investment Trusts (REITS) becoming a reality early next year, small investors will get a new opportunity to invest conveniently and safely in real estate. Securities & Exchange Board of India (SEBI) which will introduce and regulate REMFs is currently engaged in the exercise of drafting guidelines.
Real Estate funds would be investing in residential retail or office property in projects— which are complete, or under development or in the planning stage. And REITs allow small property investors to buy shares in the property held by the trust. So they can invest in real estate through the REIT. The real estate funds will be close-ended with a time horizon of 6-9 years. The best part is that small investors can invest as low as few thousands rupees and can expect internal rate of return between 15-25 percent.
“REIT would break the initial entry barrier and allow the entry with the capital amount as low as Rs. 25000. Apart from reducing the risk profile and balancing the investor portfolio, these professionally managed trusts would help small investors earn the dividends on the rental income”, says Amit K Lalit, ED, SAR Investments.
Obviously, this heralds a good opportunity for those who have been refraining from direct investment into real estate because of inherent problems of managing sheer bulk of the real estate portfolio, legal issues related to ownership of property, non-transparent transactions and market volatility related returns.
Anuj Puri, Managing Director and Country Head of JLL Meghraj says that , the REIT investments are transparent and the returns are passed on to the investor with regularity. “On the other hand, the builder may or may not pass on the returns to the investors or delay it for maintaining liquidity or diverting the funds to other ongoing projects. Unlike investing directly in a large and diversified real estate which is a cumbersome process, investing in various properties across different cities via REIT is easy and requires no knowledge as REITs are managed by experts”, he says.
Real estate experts say that REITs are equally beneficial for real estate companies as well. Developers can set up a REIT or a number of REITs with about one third of their own stake to profit from unit price gain besides making money by way of managing the REIT. Developer has also the advantage of ploughing back the money-raised through selling buildings in REIT to develop new projects, which again can be sold into REIT. In this way by flipping properties, developers owning retail property can earn returns of 20-25 percent compared to a little over 10 percent return for retaining the property over a longer period. No wonder then that a large number of domestic and international real estate funds are already here. And mega developers like Unitech are rushing to Singapore Stock Exchange to set up REIT thereby getting a foothold ahead of the Indian government allowing the operations of such trusts
Through REITs small investors get the benefit of lucrative returns by entering the property at the early development stage at a lower cost. Besides they have the advantage of lowering risk by investing in a variety of properties across different geographies. Also, the investor may not pay 100% money upfront and the balance money can be paid as and when the REIT requires funds for investment. REMF or REIT is a successfully tried and tested global model of retail real estate investment that offers substantial and steady income to small investors distributing their gains as dividend. It may well turn out to be a boon for the retail investors in India who couldnot afford to buy costly property will now be able to own property with sheer small investments.
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