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Realty on Razor's Edge

Real estate as an investment is hot again. But investors must rigorously follow processes that apply to all other investment options

Real estate investments are back in news, and I don’t mean real estate stocks, but buying actual real estate purely as an investment. However, the experience of the last two years means that any prospective investor must re-examine the basics of real estate investments afresh.

There are any number of developers who are advertising their wares purely as investments that are targeted wholly at investors. There are entire projects being launched — some of them by former high-fliers of the sector — that depend entirely on finding enough investors for individual units to enable them to take off.

But things have changed since the heady days of 2007. At that time, one of the selling points that developers used to convince and lure high networth investors (HNI) was the supposed safety and stability of real estate investments vis-à-vis stocks. The developers’ story basically was that real estate never really lost value and the price that you got in at didn’t matter because prices were going to be headed only one way, for years and years to come.

Today, this story lies in tatters. The last two years have been a nightmare for many investors. The claimed special characteristics of real estate investments turned out to be largely fictional. Now that real estate investments are being pitched again, it’s time to re-orient the process of evaluating these to the same process that must be followed with every other investment. The basic characteristics of any investment is returns, liquidity and volatility. Another factor that a knowledgeable investor would generally consider is whether a given investment moves in a different cycle than his other investments so that it acts as a hedge.

Real estate investors have learned some especially harsh lessons about liquidity in the last year or two. In any market, the basic definition of a price is whatever a buyer is willing to buy at and a seller is willing to sell at. In real estate the definition has been changed to whatever a hypothetical buyer imagined by a broker should be willing to pay were such a buyer to actually exist. This definition of price has not proven to be of much practical use to real estate investors.

You must evaluate any real estate investment that you may be considering on these same factors. However, before one gets to these factors, one has to examine a special one that unfortunately, applies to the Indian real estate sector, and that is its very existence. Your investment must actually exist or must come into existence in the timeframe you expect. However, all across this country there must be hundreds of projects which are blocked because developers don’t have funds and have typically diverted funds to other projects.

There has been some talk of the revival of a real estate regulation law in recent days. The news articles have been uniformly laudatory about how the government is about to come into action to protect the rights of real estate buyers. However, this bill has been in the news at least twice in the past decade and has each time disappeared mysteriously. One of the key provisions of the earlier version of this bill was to prevent buyers’ funds being bled into developers’ other projects.  Such a provision will be so detrimental to developers and their politician friends that you shouldn’t really expect it to become a law in a hurry. And in any case, many of the laws are actually needed at a state level so the Centre will only pass a model bill and then wait for the states to do their bit. It could be a long wait.