Five tips to reduce real estate risks and facilitate higher yields
by Dr. Atul Goel
Indian real estate is staging a spectacular comeback as demand soars in most of the nation’s major cities. Conducive market conditions, bullish economic sentiments and lower interest rates are further dovetailing the market in a positive direction.
An accelerated real estate market has also renewed investor interest. Alongside home buyers, investors are also drawn to the market in large volumes in search of better returns.
It should be noted, however, that just like financial markets, real estate is not completely devoid of risk. There are numerous kinds of risks, such as market, economic and developer-related risks, in the sector.
To make safe investments and enjoy higher yields, it is essential for investors to have a prudent risk management strategy in place. Following are five tips that can help to manage and systematically reduce risk in real estate investments.
Market Analysis: It is important to analyze and scan the market before making any substantive investment. Investors should learn about the demand-supply, potential demand, future trends in the market, etc., to assess probable appreciation. Likewise, they should also learn more about the condition of the physical infrastructure, upcoming projects in the vicinity, business/IT parks, business catchments, social infrastructure, etc. A thorough market analysis can provide valuable insights for investors.
Geographic Diversification: If someone is investing in more than one property, it is advisable to invest across geography, rather than concentrating in one market. In a country like India, despite aggregate trends, regional disparities exist. Hence, investing in multiple geographies can mitigate risk and ensure a higher return on investment (ROI). Before investing in multiple geographies, it is advisable to do the research correctly for insights into past track records of individual geographies.
Asset Diversification: Like geographic diversification, one should also invest in numerous assets to reduce market and economic risk. Putting money across assets, such as residential, commercial, retail, warehousing, etc., optimizes overall returns. It will spread risk across assets, and the overall impact of any possible downtrend in a particular category will be limited.
Developer Credibility Check: Over the past five to seven years, developers’ credibility has become essential. There are innumerable examples showing how projects from non-credible developers get stalled. Though big developers also fail, going with a credible name can reduce the risk to a great extent. Just like the developer’s credibility, it is important to verify the functional dimension of the project, which includes utility, floor plan, design, specification, etc. A good quality project will attract more investors, buyers and tenants, thereby delivering better returns.
Evaluate Your Time Horizon: Real estate is a tangible asset and requires a lot of patience. Unlike the stock market, real estate should have a medium- to long-term view to reap the benefits of the investment. If one can hold the property for a long time, then the downside risk of cyclic pitfalls can be greatly averted, and one can divest at the right time. Hence, it is advisable to assess the risk appetite and evaluate the time horizon.
Dr. Atul Goel, management director of Goel Ganga Group, and president, NAREDCO (National Real Estate Development Council) Pune Chapter, re-imagines the skylines of cities. As a business leader, he is focused on building an enterprise that is process-driven, ethical, transparent and progressive. As an entrepreneur, he is committed to creating genuine wealth for his customers, employees, partners and associates. As a developer, he is passionate about developing a society that does credit to the idea of India — an initiative that he runs with his trademark zeal.