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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Monday, February 16, 2009
Sunday, February 15, 2009
Thematic Funds
Thematic Funds are defined as Funds that have portfolio cutting across multiple sectors. A Sectoral Fund necessarily need not be thematic fund, though it has a theme that is specific to the sector. In this aspect, a thematic fund is close to a diversified equity fund. But it differs from the diversified equity fund in its concetration to the theme that it follows. Wealth Builder funds, Contra funds, Lifestyle funds, FMCG Funds, MNC Funds, Technology Funds, ELSS Funds etc.. are all examples of thematic funds.
A theme is seasonal. We have seen Auto sector Funds and Power Sector funds redefine themselves in the past. when the sector suffers slow down, the theme losts its flavour. If we remove ELSS from the above list, all are seasonal themes at one or other point in time. tax Savings will continue to be an all weather theme in India.
Some of the themes like P/E and Dividend Yield are complimentary to each other; You can set your portfolio complete to get returns in all seasons irrespective of market's direction.
Another set of complementary themes consists of large cap, mid acp and small cap funds; When market pass through long term growth, stabilty or depression, you will be benefitting from the 'full diversification' . Todays small cap become tomorrow's mid cap and subsequently the large cap. When the market is depressed, your large cap will take care of you; When the stabilty is seen, both mid cap and large cap will take care of you; When in growth, you will benefit from the small cap. This need considerably large funds than P/E and D/Y combination for same objective of 'full diversification'
Still another theme that can be used with objective of 'full diversification' is using sectoral funds. But this approach will need even larger scale of funds than the above listed two approaches.
When funds proclaim asset allocation along these lines, it is important for investor to see if its risk-return space matches with that of his profile.
If you are a first time investor, thematic funds are not for you. It is best suited for the learned, knowledgable capital market players. A super affluent investor, or a class above that, can have thematic funds as they suffice in completing the diversification he needs. He may like to earn in all weather situations by amplyfying sufficient investment in all kind of sectors/themes that are available in the market. Even in theese cases more than 5-7% of deployment is not recommended by experts .
Finally one has to look at how skewed is the theme or how wide is the theme. For example an infrastructure fund if invests only in companies with facilities like port, airport, road projects, bridges; another infrastructure fund may define it to include basic industries like steel, cement etc.. a technology fund necessarily need not be IT Fund, it may be investing in companies that provide technology in the Media/Telecom/Pharmacuetical etc..
Recently there has been a thematic fund from IDFC that follows the GDP growth in the Indian Economy. It is different from the India theme funds of SBI One India Fund that restricts to 4 regions of India, LIC MF India Vision fund that envisages tactical investment only in large cap companies. Remember both are closed end schemes whereas the IDFC comes with an open ended variety.
A theme is seasonal. We have seen Auto sector Funds and Power Sector funds redefine themselves in the past. when the sector suffers slow down, the theme losts its flavour. If we remove ELSS from the above list, all are seasonal themes at one or other point in time. tax Savings will continue to be an all weather theme in India.
Some of the themes like P/E and Dividend Yield are complimentary to each other; You can set your portfolio complete to get returns in all seasons irrespective of market's direction.
Another set of complementary themes consists of large cap, mid acp and small cap funds; When market pass through long term growth, stabilty or depression, you will be benefitting from the 'full diversification' . Todays small cap become tomorrow's mid cap and subsequently the large cap. When the market is depressed, your large cap will take care of you; When the stabilty is seen, both mid cap and large cap will take care of you; When in growth, you will benefit from the small cap. This need considerably large funds than P/E and D/Y combination for same objective of 'full diversification'
Still another theme that can be used with objective of 'full diversification' is using sectoral funds. But this approach will need even larger scale of funds than the above listed two approaches.
When funds proclaim asset allocation along these lines, it is important for investor to see if its risk-return space matches with that of his profile.
If you are a first time investor, thematic funds are not for you. It is best suited for the learned, knowledgable capital market players. A super affluent investor, or a class above that, can have thematic funds as they suffice in completing the diversification he needs. He may like to earn in all weather situations by amplyfying sufficient investment in all kind of sectors/themes that are available in the market. Even in theese cases more than 5-7% of deployment is not recommended by experts .
Finally one has to look at how skewed is the theme or how wide is the theme. For example an infrastructure fund if invests only in companies with facilities like port, airport, road projects, bridges; another infrastructure fund may define it to include basic industries like steel, cement etc.. a technology fund necessarily need not be IT Fund, it may be investing in companies that provide technology in the Media/Telecom/Pharmacuetical etc..
Recently there has been a thematic fund from IDFC that follows the GDP growth in the Indian Economy. It is different from the India theme funds of SBI One India Fund that restricts to 4 regions of India, LIC MF India Vision fund that envisages tactical investment only in large cap companies. Remember both are closed end schemes whereas the IDFC comes with an open ended variety.
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