Collective Investment Vehicle : Real Estate Investments Made Simple

by Mr. Ramalingam K

Gold &  real estate are very traditional investment avenues in India. Gold has evolved from its traditional investing &  found its place in the modern sophisticated investment world via Gold ETFs and e - Gold.

Similarly real estate is also emerging as an investor friendly avenue with less hassle via portfolio management system route or private equity route. Did you ever think that investing in real estate will one day be as simple as investing in mutual funds?

If no, then read on...

Real Estate As An Investment..!

Buying a dream home or flat to reside is basically not a real estate investment. Buying real estate with a view to generate income & capital appreciation is considered as real estate investments.

Real estate investments can be further classified into....

 1. Residential

 2.  Farm house

 3.  Commercial

 4.  Retail

 5.  Leisure.

Here Leisure is a relaxation place where you can spend free time or vacation.

Depending upon your risk tolerance &  time horizon you can invest in real estate at different risk levels.

It can be at the time of converting a rural land to urban land, or when a property is under construction after a property is already developed.

Ramalingam K.  Holistic Investment Planners 

Real estate and risk

Most often investors assume real estate prices will not fall down. It is not so.

Mid 2009 some of the real estate investments were quoting below 30% to 40% from their 2007 prices.

Real estate investments are also prone for price fluctuations.

Real estate Vs (versus) stock market..!

Real estate is a complex & complicated investment when compared to stock market investments.

Non-transparent:

There is no transparency in the price. It is not easy for a buyer or seller of real estate to identify the last transacted price in the same locality. There is no clear price discovery mechanism.

Illiquid asset:

Selling a real estate asset is a time consuming process. It can not be liquidated easily. There is no organised market for the buyers & sellers to meet.

Impact cost:

Stamp duty & Registration charges (In Tamil Nadu  Stamp duty - 7%, Registration Charges - 1%) are very high when compared to other investment products.( In India Share and Mutual Fund it is about 1% to 2.5%)

No regulator:

There is no regulator for the real estate participants & intermediaries. Anyone can become a builder / promoter. Technical qualification is not mandatory. Also anyone can become a real estate intermediary or advisor. There is no certification or training to be completed before practicing. As there is no qualification requirement for participants as well as the intermediaries, it is very difficult to see best business practices.

Real estate hassles

The other hassles with reference to real estate investment are documentation, maintaining the asset without any encumbrances, and genuineness of the title deed.

There are some practical problems with diversification. Normally an investor invests in a real estate in her / his own locality. It is very rare to find someone in Chennai investing in the real estate properties located at Delhi, Mumbai or Kolkata.

Affordability also limits diversification. An investor may not be able to diversify his investments across various cities with a budget of say Rs. 30 lakh or Rs. 50 lakh.

It may not be possible for an individual investor to buy a plot of land and develop a viable project on that land and sell it in the market.

Managing project development needs some kind of expertise. Even if an individual is able to do it, he / she will be doing it in his / her  limited ways & means.

There are some collective investment vehicles that are promoted by an investment management company. The investment management companies collect money from investors. Being professionals, they will identify good projects & enter a joint venture with project developers. Being big in size they are able to diversify across cities as well as different type of real estate investments such as housing, commercial, hospitality and the like. These investment management companies charge a reasonable management fees.

Collective Investment Vehicle..!

At times they collect money via PMS (Portfolioa Management Service) route& at times via PE (private equity) route.

The minimum investment ranges from Rs. 10 lakh to Rs. 25 lakh. This amount needs to be invested over a period of  three years. That is they will collect money from investors in Four or five  installments. After the 3rd year whenever investors exit from a project the investment management company will repay the principal employed in the project as well as the profit generated out of that project. At the end of 6th or 7th year, the investment management company will exit from all the projects.

The advantages of this collective investment vehicle are:

^ One can invest in real estate without any hassles.

^ The professional investment management companies manage all the hassles

  

^  One can invest in various real estate projects at a time

   

^ One can geographically diversify investments pan India

   

^ One will be able to apportion total investment into small sums in large projects like township development, Retail, Commercial, Technology Parks, industrial estates and health cities etc

   

^ Cost advantage because of economies of large-scale operation

Because of the advantages & ease of investment involved this is really an investor friendly investment vehicle.

Apart from regular stocks, MF(mutual fund) & FD (fixed deposit) investments investors can consider investing in these real estate products also.

This will give better diversification to your overall portfolio. Investors need to be careful in choosing such investment options.

Background of the investment management company &  their transparency levels are more important. Investors can seek the advice of the professional financial planners before investing.

This investment vehicle is in its primitive form only. It still needs to go a long way. As of now there are only a very few companies in India which specialise in promoting collective real estate investment products. But in the coming years such kind of products will be available from various investment management companies & in different varieties like our present mutual fund schemes.

Mr. Ramalingam K, an MBA (Finance) and CFP (certified financial planner), is founder & director of Holistic Investment Planners (P) Ltd, Chennai. E.Mail: ramalingam_007@rediffmail.com , ramalingam@holisticinvestment.in

Mr. K. Ramalingam, MBA, CFP CMHOLISTIC INVESTMENT PLANNERS
Director & Chief Financial Planner
Holistic Investment Planners
10/15, Second Cross Street, Seethammal Extn., Teynampet,
Chennai - 600 018, INDIA.

Phone : +91-44-24313227, +91-44-42030722
E-Mail : customercare@holisticinvestment.in

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