Reality Investments

Other than Primary Residence, if one makes investment in Real Estate it could take any form like Farm House, Commercial space given on rent etc.. to REITs and REMFs. The investments in reality sector with th eobjective of capital appreciation or income in the form of rentals is at the centre of this discussion. In India, about 17% of portfolio forms real estate among HNIs. 15-20% asset allocation is recommended by experts for real estate. Study conducted by Sneha(2009 Feb ) found out that the portfolio consisting of real estate add stability to the portfolio rate of return over the period 2004-2008.

Penthouses, villas, duplexes, luxury apartments, condominiums - India has all the facets of luxury housing on par with international standards. Besides luxury apartments, the integrated township concept has also been ushered in, in a big way in India. These integrated townships boast of luxury residences with features like golf course, tennis academy, shopping complexes, 5-star hotels, medi-city, university, commercial complexes and IT Park etc..

A study conducted by Association of Foreign Investors in Real Estate(AFIRE) found USA stacked up at first position, China second followed by India.


India has a shortage of 19.4 million housing units. During the 11th 5 year plan(2007-2012) 45 million housing units will be required. The demand from IT/ITES sectors have been a real push to the increased institutional investment in the reality sector along with demand from organised retailers during 2006. Another factor that contributed to the growth of the sector is the Govt's policy on Special Export Processing Zones(SEZ). At this stage the growth rate was 30%, $16 billion industry expected to touch $60 billion by 2010 by ASSOCHAM

'Currently less than 4 dwelling units per 1000 of population per annum get constructed in India. However the UN recommendation for developing countries is of 8 to 10 dwelling units per 1000 per annum in the next 20-30 years to arrest the detoriation of housing situation.Access to land at reasonable prices for housing is impossible. This has led to acute housing shortages. The Urban land ceiling and regulation act (ULCRA) of 1976 appears to have been wrongly implemented and is the main factor for the spiraling real estate prices.Land is not available to housing due to restrictions placed on conversion of agricultural land to non-agricultural land. The land prices in Bombay, Calcutta and Delhi are more than those in the western cities like London and Washington D.C. In fact, in the prevailing market rates for housing in Bombay, at Rs. 400 per square feet to Rs. 20,000 per square feet, 97% constitutes the cost of land and 3% the cost of construction.'

Due to overvaluation, Increasing Interest rates (early part of 2008), shakeouts happened in the capital markets coupled with global meltdown washed away major part of market capitalisation. The reality Index of BSE that stood at1317.89 in 2 January 2006 rose to to all time high of 13647.15 in 14 January 2008 and now stands at1519.37 (16 Feb 2009). Developers used to announce frsh projects after projects during the glorious days. ASSOCHAM study says it has fallen by 82%.

When prices of dwelling units skyrocketed, interest rate shot up affordability got a dip. Demand cannot grow faster in this phase.



Today what we have is PEs (Private equity funds) that are limited edition open to High Networth Individuals. Listed at London's Alternative investment Market(AIM), pan-european Exchange , Euronext or Singapore Exchange it attracts NRIs and foreign investors alike. Businessworld has estimated that by end 2007, $15 million PEs would have entered indian markets.


FDI flow of $2.7 billion accounted hardly 4.5% in 2003-04 to the reality sector. But this increased in 2004-05 to $3.7 billion contribution 10.6% to the realty. However in 2005-06 the FDI of $5.46 billion had 16% committed to this sector.

There is reality index of 14 stocks in BSE. How does one assess a reality compnay share?
Land bank can be one of the parameters. Another important parameter is the Management: How much disclosures does the compnay give. How many projects have been completed in time?

Have a look at Working Capital Ratio to Sales. Debt to Equity, Operating Margin and Return on Capital Employed. For a listed company also see the Price to Earnings ratio. The multiple will throw some light how the market is valuing that compnay.


Read the above ratios together with Price to squre foot ratio and Profit to square foot ratio to complete the picture.


The Income Tax sops available to individaul investor for repayment of interest and principal is a demand pull factor from the retail sector.

Income could be reduced uptoRs 1,50,000 towards interest on Housing Loan for purchase/Construction as per Sec 24(b) of IT Act in addition to the repayment of principal amount allowed under Sec 80C.



However, affordable housing needs lower cost of construction (steel, cement etc..). The Projects coming up in Tier-II, Tier-III cities will take off only if well connected with major cities. People should be able to go for work and commute back easily.

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