Real Estate: The Hot Market

Property has always been looked upon as lucrative investment. The government clearing 100% FDI investment on the automatic approval route in construction and development project in February 2005 has seen a buoyant boom in the real estate market. The real estate market in India is expected to touch US$50bn in 2008, is expected to grow at 30% per annum and is predicted to be one of the key contributors to GDP.

According to experts and analysts, investment in real estate is expected to yield between 13%-16% returns. The booming real estate sector has seen a host of new property developers entering the market which include both foreign and domestic developers. The boom in Indian real estate sector is mainly due to demand for official and commercial space. Also the economic growth of the country is strong reason for boom in real estate.

Reasons for Investing in Real Estate:

1) Higher risk adjusted returns as compared to various asset classes over a period of time.

2) Assured regular income

3) Capital appreciation

4) Inflation Hedge

5) Portfolio diversification.

Advantages of Investing in Real Estate Market

1) Theee is low correlation between real estate and other asset classes such as equities and bonds. Thus investor holding diversified portfolio of real estate securities across the world can yield more benefits than equities and bonds.

2) Investment in real estate are not prone to severe shocks as experienced in equity market and FII outflow from India.

3) Profits from real estate investments results from various factors such as:

- A dependable and growing flow of income

- Amortization

- Value creation (appreciation)

- Instant gain (bargain purchase and selling price)

- Government benefits (Tax deductions, etc)

- Hedge against Inflation

- Portfolio risk diversification

Disadvantages of Investing in Real Estate Market

1) A mere possession of real estate property without any intention to seel it, would not reap any benefits

2) Real estate requires expenditure for maintenance at regular interval of time.

3) When needed to sell, it is not easy to find a buyer.

4) The market value keeps on fluctuating

5) Real estate properties are bounded by geographical restrictions, because their value keeps on fluctuating with respect to changes in local laws, government policies etc.

Strategies of Investing in Real Estate

Cost approach: The investor should subtract the depreciation that would accumulate on the real estate, compare the present time value with the cost acquiring any other asset for the same amount and then decide to purchase the least cost investment.

Comparable Sales Approach: The investor should compare the cost of similar property that would have sold in recent past and considering the market trend, appropriate decision should be taken by the investors.

Income approach: The investor should compare the prospects of the income of intended property with other alternatives, keeping in mind the market trend, inflation, and other economic factor.

Though real estate is not considered as an attractive avenue for investment compared to other alternative investment but it is promising in long run.