Becoming a Man of Property

By Priya Nigam

Every time I read about the escalating property prices, I can’t help wishing I had invested in some about 5 years back. However, property appears cheap only in retrospect! I’m fed to the teeth with hearing, “Oh, I bought this apartment in Gurgaon for Rs30 lakhs only 4 years back and now it’s over a crore.” And I think to myself, “Why wasn’t I investing in that flat 4 years back?” The truth is that 4 years back (or even today for that matter), I didn’t have Rs30 lakhs to invest. So, can’t I play the property market without having to sacrifice my current lifestyle to pay off a loan? Yes, the SEBI has now ensured that I can!

Property prices in India have been rising fast, and the trend is not limited to the metros and big cities. Merrill Lynch has projected that the Indian realty sector would grow from $12 billion in 2005 to $90 billion by 2015. But why is the real estate sector booming? Well, to begin with, the economy has been growing at more than 8% per annum and is likely to continue on this trend for some time. Economic growth is accompanied by rising incomes and more and more individuals wanting to buy houses. Also, the middle class is huge (over 30 million) and growing. The burgeoning real estate sector has also been boosted by the government’s move in March 2005 to allow 100% FDI in the construction business. Real estate investments are not limited for personal use, with the segment offering returns of between 12% and 15%, versus similar investments in developed countries yielding returns of 3% and 4%.

Now, even if you don’t have big money, you can still play the real estate boom. The Securities and Exchange Board of India (SEBI) has decided to allow mutual funds to launch Real Estate Mutual Fund (REMF) schemes. The REMF units will be listed in the stock exchange and the net asset value (NAV) of the scheme will be declared everyday. The REMFs would need to have assets valued every 90 days by two independent valuers. So, even if you have a few thousand rupees, you can tap on the exponential growth in the real estate market. REMFs will also help you diversify your portfolio. The real estate investments could be in commercial or residential properties and across various cities. Moreover, this regulation would support increased liquidity, planned financial methods, enhanced disclosures, improved transparency and increased accountability in the real estate market.

But before you jump in and begin investing in property, it’s important to keep a few things in mind. I’ll begin by stating the obvious… Property prices can come down. REMFs will be close-ended funds. So, you can not sell the units back to the funds. You can only trade them on the stock exchange. Moreover, in order to really benefit from rising property prices, you may need to have a long-term investment horizon, which also increases associated risk.  For the short term, I recommend you read this facinating article on how the global credit crunch is affecting India.