Until REITs become a reality…

The government has put certain restrictions on buying and selling of real estate in India to prevent speculation. The Indian government has adopted a very cautious policy to avoid a situation similar to that faced in the United States.

REITS and REMFs

Despite the fact that capital market regulator,Sebi,has formulated the guidelines,none of these products have seen the light of the day yet. REITs (Real Estate Investment Trusts) and REMFs (Real Estate Mutual Funds) have the potential to empower retail investors and allow investment in this asset class. These vehicles will present them with a liquid,dividend-paying means of participating in the real estate market in the country. We are all still awaiting clarity on the introduction of REITS and REMFs in India.

Reliability of developers

The extent to which one can rely on the professionalism of a developer depends on the developer’s existing credibility in the market as well as strength of enforcement agencies specific to each state. With the sector maturing a little,larger developers are increasingly becoming more transparent and professional in their dealings. There is increased accountability in the organised sectors,brought on by greater awareness among buyers and also increased investments by international investors. However,players in the unorganised parts of the market – especially those who have a very limited number of smaller projects to their name – are often not subject to the same accountability.

Therefore,the safety of an individual real estate investor’s interests in a property transaction continues to depend a lot on personal research and understanding of the real estate market,especially in local terms,prior to purchase.

Primary factors to be considered

Location,legal non-encumbrance of the property,present and future market drivers in the locality,duration of holding capacity,financial ability and personal investment objectives are the primary factors to keep in mind while investing in property.

One should ascertain the correct entry point,which is a challenge in the current times. While it is understandable that buyers wish to wait for prices to fall,there is a definite danger in waiting too long for the perfect opportunity. Much as in the stock market,it is impossible to predict the point of the lowest ebb in the real estate market. The buyer may lose out on the best properties and deals by waiting too long.

Individual property investors should be focused on what they are looking for,and should be selective about their purchase. Purchase decision should be based solely on the availability of a good deal in the location of choice.

When to invest

The right entry point for property investment is some sort of an enigma – it can usually only be judged in retrospect. At the current time,smaller property investors should realise that certain areas within larger cities like Mumbai may correct in the mid-term; it may be wiser to delay purchase for eight to ten months. In the case of some other cities,the best time would probably be now. One cannot give a blanket judgment on this; the best course is to study the local market and inquire into the prevalent and expected dynamics there.

However,a good yardstick is affordability. One should also know how much of one’s wealth can feasibly be invested in a real estate asset. Once this is determined,and a property with sufficient appreciation potential is available at the desired location and at a good price,an investor should make his move. Taking a speculative watch-and-wait stance should be a game of experts,who have the capacity to risk a loss.

The writer is joint managing director (capital markets) at the Jones Lang LaSalle Meghraj