Real estate as an asset class comes with its own unique characteristics of risk and return. The return from real estate investing comes from capital appreciation as well as regular income from rentals.
Its risk profile is quite different from equities and bonds and, therefore, its performance has little correlation to the performance of equities and bonds. This makes real estate an ideal diversifier to a portfolio of conventional investments.
The inherent risk of equities and real estate is termed high but at particular price level this may be reduced and entries at such points can create long-term alpha which may be difficult to beat. That wonderful time to invest in property when prices were distressed is definitely gone. The investments in property now will not yield super normal return.
However, that does not take away the importance of real estate in a portfolio. Real estate provides both a regular cash flow of income to the owner in the form of rent as well as capital appreciation. The compounding effect of the two put together over the long term adds up to a very decent return. It is also a very acceptable form of collateral for loans and provides an inflation hedge in a manner quite similar to investing in non-perishable commodities such as gold.
Entry, exit points
Outperformance on portfolios can be achieved through proper entry and exit points. It is very difficult to time the exits right but it may be relatively easier to time the points of entry right. A good point of entry in any asset creates margin of safety and helps in capturing the upside.
These great points of entry present themselves at times of extreme pessimism for the asset class. The returns get magnified as the pessimism starts to abate and the asset reverts to normal levels of risk-return profile. Such a time to invest in real estate is behind us. Looking at the trends of the industry, the sector has come back to normal and the problems related to the sector have reduced in magnitude. The sector thrives on leverage whether it is at the consumer level or at the developer level.
A credit squeeze in either side results in the sector seeing tough times. The credit to the sector and demand for housing loans is definitely picking up which has led to a strong bounce-back.
A large number of developers have been able to successfully recapitalize the balance-sheets, thus improving their financial stability and outlook. The encouraging responses to their recent project launches have led to improved cash flows. This in turn has provided a boost to the developers to consider land acquisitions at attractive prices. As most of these projects are likely to be mixed-use/commercial projects, the positive response to the recent land auctions also signals towards likely recovery in the commercial vertical.
Strong volumes
Residential projects across segments have witnessed strong volumes. For instance: (i)
Phase-III of DLF``s residential project in Delhi, Capital Greens, received encouraging response, and (ii) Godrej Properties sold/booked 800 units at its mid-income housing project in Ahmedabad, Godrej Garden City, within one week of launch.
Backed by strong sales volumes, developers in Mumbai and the National Capital Region (NCR) have undertaken multiple price increases across projects over the last 3-6 months. On an average, prices have increased by approximately 30% across projects in these regions. These are times when investors have been worried about the sector.
Its risk profile is quite different from equities and bonds and, therefore, its performance has little correlation to the performance of equities and bonds. This makes real estate an ideal diversifier to a portfolio of conventional investments.
The inherent risk of equities and real estate is termed high but at particular price level this may be reduced and entries at such points can create long-term alpha which may be difficult to beat. That wonderful time to invest in property when prices were distressed is definitely gone. The investments in property now will not yield super normal return.
However, that does not take away the importance of real estate in a portfolio. Real estate provides both a regular cash flow of income to the owner in the form of rent as well as capital appreciation. The compounding effect of the two put together over the long term adds up to a very decent return. It is also a very acceptable form of collateral for loans and provides an inflation hedge in a manner quite similar to investing in non-perishable commodities such as gold.
Entry, exit points
Outperformance on portfolios can be achieved through proper entry and exit points. It is very difficult to time the exits right but it may be relatively easier to time the points of entry right. A good point of entry in any asset creates margin of safety and helps in capturing the upside.
These great points of entry present themselves at times of extreme pessimism for the asset class. The returns get magnified as the pessimism starts to abate and the asset reverts to normal levels of risk-return profile. Such a time to invest in real estate is behind us. Looking at the trends of the industry, the sector has come back to normal and the problems related to the sector have reduced in magnitude. The sector thrives on leverage whether it is at the consumer level or at the developer level.
A credit squeeze in either side results in the sector seeing tough times. The credit to the sector and demand for housing loans is definitely picking up which has led to a strong bounce-back.
A large number of developers have been able to successfully recapitalize the balance-sheets, thus improving their financial stability and outlook. The encouraging responses to their recent project launches have led to improved cash flows. This in turn has provided a boost to the developers to consider land acquisitions at attractive prices. As most of these projects are likely to be mixed-use/commercial projects, the positive response to the recent land auctions also signals towards likely recovery in the commercial vertical.
Strong volumes
Residential projects across segments have witnessed strong volumes. For instance: (i)
Phase-III of DLF``s residential project in Delhi, Capital Greens, received encouraging response, and (ii) Godrej Properties sold/booked 800 units at its mid-income housing project in Ahmedabad, Godrej Garden City, within one week of launch.
Backed by strong sales volumes, developers in Mumbai and the National Capital Region (NCR) have undertaken multiple price increases across projects over the last 3-6 months. On an average, prices have increased by approximately 30% across projects in these regions. These are times when investors have been worried about the sector.
Residential volumes continue to gain momentum in key cities such as Bangalore and Chennai in the South, led by improved IT/ITES outlook and stable rates in these locations.
The commercial vertical has been witnessing encouraging signs of revival. While transaction volumes over the last 3-4 months were aided by demand from non-IT (mainly telecom and pharmaceutical) companies, in the last 1-2 months, there has been a pick-up in volumes from IT/ITES companies. Historically, IT/ITES accounted for 80% of the commercial office demand. Vacancy levels are likely to drop to 20% in CY11 from the current 24% due to sharp supply curtailment. The real estate sector remains firmly set for recovery, following the successful balance-sheet recapitalization by key real estate companies and pick-up in deal activity.
The key catalysts that would drive the sector in the medium term are recovery in the commercial and retail verticals, and visible acceleration in execution of projects.
The commercial vertical has been witnessing encouraging signs of revival. While transaction volumes over the last 3-4 months were aided by demand from non-IT (mainly telecom and pharmaceutical) companies, in the last 1-2 months, there has been a pick-up in volumes from IT/ITES companies. Historically, IT/ITES accounted for 80% of the commercial office demand. Vacancy levels are likely to drop to 20% in CY11 from the current 24% due to sharp supply curtailment. The real estate sector remains firmly set for recovery, following the successful balance-sheet recapitalization by key real estate companies and pick-up in deal activity.
The key catalysts that would drive the sector in the medium term are recovery in the commercial and retail verticals, and visible acceleration in execution of projects.
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