India is one of the hottest investment destinations for real estate today. Be it investing in prime urban centres or developing an Airbnb business in a tourist location, this industry looks more lucrative than ever. Meanwhile, there are relatively novel ways of real estate investing gaining popularity in the country.
According to a joint report by the National Real Estate Development Council and Ernst & Young, the size of the Indian real estate market is expected to reach $1 trillion by 2030.
Source: www.shobha.com
It is only commonsensical to consider investing in this booming industry.
In this blog, we are discussing the various investment options available so that investors can make an informed decision.
But first of all, What is real estate?
Real estate includes land along with its attachments - both natural and man-made which includes buildings, natural resources, wildlife, water, crops, etc.
Types of real estate
Generally, real estate is classified into 4 categories below :
Residential Real Estate - As the name signifies, this includes those properties used for residential purposes like single-family homes, condos, housing co-operatives, multi-generational houses and vacation houses. These also include under-construction and resale homes.
Commercial real estate - Those properties where commercial activities take place like large apartment complexes, malls, office buildings, stores, theatres, parking facilities, storage facilities, etc.
Industrial real estate - Industrial real estate encompasses any property that facilitates activities such as manufacturing, production, distribution, storage, or research and development (R&D).
Land - Any vacant, underdeveloped land or agricultural land comes under this category.
Now that we have a fair understanding of different types of real estate, let us look at the different types of real estate investing.
Let us start with the traditional mode of real estate investments
1. Investing in rental properties - Residential
This is one of the earliest forms of real estate investments where spare rooms to multi-storey houses and vacation homes are let out for rental income.
This type of investment needs huge upfront money to buy the property and one needs to make sure the property is not entangled in any legal disputes. There will not be any shortage of tenants if the property is situated in a prime location. The investor has to make an agreement with the tenant regarding the terms and conditions during the agreement period.
Pros - Apart from regular income in the form of rent, investors also gain from the property appreciation between the time of buying and selling. Additionally, the investor can enjoy certain tax benefits pertaining to residential real estate investment.
Cons - Some of the limitations of this mode of investment include vacant periods (think COVID), managing tenants and continuous property maintenance. Suppose you are having vacation rentals like an Airbnb, you should have a full-time employee to ensure proper maintenance of the property during the tourist season.
The huge demand in the affordable housing segment is expected to drive the growth of the residential segment. By 2030, an additional 25 million affordable housing units are required to meet the growing urban demand. This segment has hugely benefitted from legislation like RERA (Real Estate Regulatory Authority) and initiatives like PMAY (Pradhan Mantri Avas Yojana).
2. Investing in rental properties - Commercial
Renting out or leasing out space to single or multiple businesses comes under commercial real estate investments. It can be as simple as a single-room property housing a grocery shop in a small town to malls housing retailers, theatres, supermarkets, etc. in metros.
The country’s economic growth prospects is driving the commercial real estate sector. There is higher demand for flexible workspaces in major cities induced by demand from startups and SMEs. Among the top cities, Bengaluru leads the trend with the highest flexible seats leased in 2022, followed by Pune and Delhi NCR. This segment is the popular investment choice among HNIs (High Net Worth Individuals) and international PE investors.
Pros - Compared to residential real estate, commercial real estate commands more rentals. The lease agreements would be for a longer duration with an in-built rental increase every year. Hence, a stable increasing revenue is ensured for a longer period. Apart from location and upkeep of the property, if the space has marquee customers or brands, then the value will appreciate depending on this aspect as well.
Cons - Though commercial real estate is lucrative, it needs more upfront money and a lot of effort is required in the maintenance. Dealing with multiple tenants would require maintaining multiple contracts and this requires the help of professionals like lawyers, accountants, etc. Other than tenants, the property would be used by the public, hence dedicated staff should be employed for the upkeep.
3. House flipping
This is a short-term strategy where investors buy a property, renovate it and resell it for a profit. Sometimes, flippers sell the property without any major maintenance work.
Pros - When executed correctly, this strategy generates higher returns in a shorter period of time.
Cons - House flipping requires deep market knowledge to identify undervalued properties. If investors are not able to offload the property within the estimated time, it would lead to mounting losses in the form of interest and loan repayment.
Now, let us look at some novel ways of investing in real estate
4. REITs (Real Estate Investment Trusts)
REITs are companies that own and operate income-generating properties. REITs pool money from investors (similar to mutual funds) and use it to purchase & operate real estate. Investors in turn receive interest and (or) dividend income depending on the type of REIT. REITs are supposed to distribute 90% of returns to investors and the rest 10% is reinvested.
There are three types of REITs:
Equity REITs - These are the primary form of REITs. Equity REITs own and manage income-producing real estate. Revenues are generated primarily through rents.
Mortgage REITs - Mortgage REITs do not own properties but lend money to real estate owners and operators. Their earnings are generated primarily by charging interest on loans.
Hybrid REITs - These REITs use the investment strategies of both equity and mortgage REITs.
In the Indian context, REITs are a relatively novel concept. Currently, there are 4 REITs listed on the stock exchange.
Embassy Office Parks REIT
Mindspace Business Parks REIT
Brookfield India REIT
Nexus Select Trust REIT
Pros - REITs are traded on stock exchanges just like stocks and hence there is no issue of liquidity as in the case of traditional investment methods. Retail investors would get exposure to commercial properties without the hassles of owning and maintaining the property. REITs are regulated by SEBI, hence high level of transparency is maintained.
Cons - Since REITs are traded on the exchange, the price is affected by market volatility. Also, there are very low chances of capital appreciation as 90% of the returns are redistributed.
5. Crowdfunding platforms
Investors come together through online platforms and pool funds to invest in commercial or residential deals. The whole process is facilitated through online platforms where different properties are listed and individual investors can choose from them.
There are 2 types of crowdfunding
Equity crowdfunding - Here, individual investors buy a stake in properties listed and receive a share of the profits.
Debt crowdfunding - In this, the investors lend money to real estate developers and receive interest payments.
SEBI has brought crowdfunding platforms under the AIF Regulations and hence, certain criteria in terms of minimum and maximum investment, disclosure agreements, etc need to be met.
Pros - Real estate crowdfunding platforms employ proper due diligence and maintain transparency. Investors get detailed insights into investment opportunities for informed decisions. This method can yield higher returns due to lower overhead costs and pooled funds.
Cons - It lacks liquidity, making quick access to invested capital challenging. Investors do not have any decision-making control over the management of the project.
Final thoughts
In this blog, we have analysed the major types of real estate investments available in India. It is clear from our discussion that the real estate landscape offers investment options suitable for investors with different investment objectives and varying risk tolerance. Real estate helps to diversify one’s portfolio and it is up to each one of us to choose the suitable bet.