I walk in to the “Tehsil”. People everywhere. Filth. Thick urine stench. Flies. Mosquitos. This is where all the real-estate deals in town are sealed. As soon as I walk in, I want to walk out. Nobody moves without being bribed. Pitch darkness in the registrar room. Five clerks smoking the same “Beedi”, drinking water from the same glass. They hate my face. The feeling is mutual. I dip eight fingers and two thumbs in stale and infected stamp ink to “sign” a few papers with my fingerprints. Next, the government photographer takes me into an inside room where the air is so thick and stinky, that one can barely breathe. Photographs are taken through a pathetic webcam (!) connected to a desktop donated by the red-cross!! The deal is sealed with a final round of bribes. I swear, never to get into a real-estate deal again.
As I walk out, the whole real-estate scenario in India is rushing through my head. More than 50% black money payments in all deals with very few exceptions. One gets jipped on the broker’s commision. Lots of running around and spade work. Payments take a long time to realize, after a lot of coaxing. If one doesn’t do one’s research properly, one can get stuck with a property under litigation. If the property is too far away from one’s eyes. there is danger of “kabzaa”, or the taking over of one’s property by nomads or vandals. This whole asset-class is seeming to be highly avoidable for a white-collared investment profile like mine. Or is it?
Fact remains that real-estate is an essential part of any balanced portfolio. I badly want to incorporate real-estate into my portfolio. Simultaneously, I don’t want to be part of any of the stone-age scenarios listed above. What’s the primary tenet of my investment philosophy? I want everything to be in white. All assets declared. All lines drawn, paper-work in order, all taxes paid, no ambiguity. Can one buy into real-estate under such a frame-work? I do extensive research. Today, the world is actually at your fingertips. And the bottom-line of my research is yes, one can.
I find that REITs (Real-Estate Investment Trusts) have come into India. These buy blocks of real-estate from the corpus collected from a pool of investors under the Private Equity asset class. If they rent out the real-estate, they pay their investors a quarterly dividend from these rentals, typically 10 – 12 % p.a. The real-estate remains locked-in for 4-6 years, after which it is sold, and the principal and profits are distribited to those who put up the money. Fees are on the high side, 2.5 % entry load and 20-30% of profits after yielding 11%, plus another 2.5% management fee p.a. Ticket size for entry is a minimum of Rs. 5 Lakhs. All transactions are in white through cheque or RTGS. Come to think of it, its not a bad deal. The rentals yield more than fixed deposits. I get to play real-estate in white. Expected returns after all deductions are typically 20-25% p.a. Come on, this is a good deal. Among others, Milestone Capital has five schemes going in this category.
What else is there? What’s quoted on the bourses? I’m familiar with stock markets. No lock-ins, full power over your investment, liquidity on the fourth day, no third party involvement, just purchase a scrip online and it will be automatically transferred to and stored in your demat account and will be visible to you at all times when you log into your savings account net-banking. But what scrips to buy? I find that there are plenty or real-estate stories being quoted on the bourses.
There are pure land-development plays, like Anant Raj Industries Limited. There are hidden real-estate plays, like Century Textiles, Indian Hotels, and yes, even Infosys. There are coupled plays like construction companies that also develop low to high category real-estate – Nagarjuna Construction is one. In fact, the stock market is loaded with real-estate plays. But how do these real-estate scrips behave? Are they more coupled to market behaviour, or do they swing in tandem with the real-estate cycle? What I find is this. When real-estate moves in a range, these scrips swing with the market. When real-estate breaks out, these scrips actually do break out. So yes, this is a real-estate play in the long run.
With that, I have my niche all sorted out, and go about incorporating real-estate into my portfolio. It takes about two years to do so, and gives my portfolio the only free luch available in the world of investing, i.e. that of diversification.