The fundamental aims of any residential property investment should be to maximise yield as well as capital gains and to reduce the risk as far as possible. To illustrate, renovating and embellishing a property makes it eligible for a higher rent, which means maximised yield. Property investment aimed at capital gains involves buying real estate cheap and selling it at a higher rate, thereby maximising one’s ROI. An astute investor will also buy a well-located property at a high price if the rental market is booming, since this makes it possible to rent it out for as long as it takes price to rise again.
The risk factor in real estate investment lies in the possibility of buying at a higher price and having to sell at a lower one in a depressed market. It is also risky to try time the market to discern the ‘best’ time to invest. Much like in the stock market, it is impossible to predict the point of lowest ebb in the real estate market. The danger in delaying investment too long is two-fold – firstly, one may lose out on the best properties, and secondly, the market may pick up ahead of one’s predictions, meaning that the lower rates may no longer be available.
Professional investors with an eye on capital appreciation look for bargains on the property market. It is possible to find such bargains even in a boom period, since there are always property owners who need to sell their holdings quickly for financial or other reasons. To know whether or not one is picking up a bargain requires some basic insight into the current state and inherent nature of the property cycle. This cycle takes approximately seven years for one complete revolution.
Having a good knowledge of the local property market – meaning the market in the area one wishes to invest in – is also important, as is sufficient insight into the national and global markets. This is because the trends that drive the global market influence the national market, which in turn has a significant bearing on the local market.
In the current scenario, the Indian residential property market is sluggish because property prices have gone through the roof in cities like Mumbai, while there has been an increasingly slower-selling build-up of residential property developers’ inventories in Delhi NCR, Pune and other cities. Another reason is the recent hike in lending rates. This has made it harder for intending home buyers to acquire property, thereby giving a fillip to the rental market. Purchases on the residential property market pick up when lending rates or property prices reduce, because people would rather put their money into self-owned property rather than spend on rent.
For individual investors, real estate is always a good long-term risk diversifier that has the potential to generate very satisfactory risk-adjusted returns. Real estate has a low volatility quotient, and also low correlations with stock markets and debt. Investors with a long-term view should continue to include property in their investment portfolios.
In Short:
- Establish your investment goals and strategy
- Keep your focus on maximizing yield and capital gains
- Reduce risk as far as possible
- Do not attempt to time the market too accurately
- Know the local market and also keep abreast of developments on the national and international markets
- Invest for the long term
The author, Mohammed Aslam, is COO-Residential Services, Jones Lang LaSalle India
