Real estate - An Investment Vehicle

REAL ESTATE
BY: SUBHAM MITRA
&
SURYANSH DHAWAN
SubhamMitra&SuryanshDhawan
1

OBJECTIVES
 Introduction To Real Estate Investment
 5 Simple Ways To Invest In Real Estate
 6 Worst Types Of Real Estate Investment
 Key Reasons To Invest In Real Estate
 Huge Ticket Size To Enter Real Estate Market
 Add Some Real Estate To Your Portfolio
 Is Real Estate a Retirement Secrete Weapon?
 Impact Of Real Estate In Global Market
 Big Daddy’s Of Real Estate
 Risk Involved In Real Estate
 Current Scenario
2

INTRODUCTION TO REAL ESTATE
INVESTMENT
“ Real Estate cannot be lost or stolen, nor can it be
carried away. Purchased with common sense, paid
for in full, and managed with reasonable care, it is
about the safest investment in the world.”
By: Franklin D. Roosevelt
3

5 SIMPLE WAYS TO INVEST IN REAL ESTATE
 A Basic Rental Property: According to the U.S. Census
Bureau, real estate has consistently increased in value since
1940.
 Real Estate Investment Group: Real Estate groups are
sort of like small mutual funds for rental properties. A single
investor can own one or multiple units (self-contained living
space), but the company operating the investment group
collectively manages all the units. In exchange the company
takes a percentage of the monthly rent.
 Real Estate Trading: Like the day traders who are leagues
away from a buy-and-hold investor, the real estate traders are an
entirely different breed. Real estate traders buy properties with
the intention of holding them for a short period of time & selling
them for a profit. This technique is also called flipping properties.
4

5 SIMPLE WAYS TO INVEST IN REAL ESTATE
(CONT…..)
 Real Estate Investment Trust: . A real estate
investment trust (REIT) is created when a corporation (or
trust) uses investors' money to purchase and operate income
properties. REITs are bought and sold on the major
exchanges just like any other stock. A corporation must pay
out 90% of its taxable profits in the form of dividends to keep
its status as an REIT.
 Leverage: If you want to buy a stock, you have to pay the
full value of the stock at the time you place the buy order.
Even if you are buying on margin, the amount you can borrow
is still much less than with real estate. Most "conventional"
mortgages require 25% down. However, depending on where
you live, there are many types of mortgages that require as
little as 5%. This means that you can control the whole
property and the equity it holds by only paying a fraction of the
total value. 5

6 WORST TYPES OF REAL ESTATE
INVESTMENT
 Anything that doesn’t generate rental income: Too many
people invest in properties hoping that they will go up in value.
But there is an opportunity cost to having money sit in real
estate that doesn’t pay any income.
 Anything with negative cash flows: If you buy a “prize
property” — such as a fancy downtown fancy condo, beach
property or vacation rental — it’s probably going to be 20+
years before you get your first dime of positive cash flow. And
that’s just no way to invest your hard-earned money.
 Tenant-in-common (TIC) investments: These were popular
from 2005 to 2007 as a way to diversify a portfolio without
having to deal with the hassle of owning and managing real
estate. But few people ever earned a dime because of all the
costs and fees associated with the agreements.
6

6 WORST TYPES OF REAL ESTATE
INVESTMENT(CONT….)
 Development deals: Development of land is extremely high
risk. There are entitlement, construction and market pricing
risks, plus countless others.
 Condo-hotels, intervals & time-shares: These aren’t even
investments. There’s no ability to predict cash flows, rental
income or future value/sales prices. And they are very hard to
resell and typically only at a fraction of the original cost.
 Foreign real estate: You might be OK buying real estate in
Canada or Britain – however don’t forget about the foreign
currency risk — but foreign countries generally have different
real estate laws, protections and fluctuating currencies,
making these properties extremely high risk.
7

KEY REASONS TO INVEST IN REAL ESTATE
8
“The global economic recession of 2008 is often linked to the
United States housing bubble and subprime mortgages. In the
aftermath of the recession, there was much negative
sentiment over the real estate sector and few were inclined to
consider investments into the sector, in a positive sense.”
 Competitive Risk-Adjusted Returns: Based on data from
the National Council of Real Estate Investment Fiduciaries
(NCr.EIF), private market commercial real estate returned an
average of 8.4% over the 10-year period from 2000 to 2010.
While it's true that historic estimates of real estate volatility
should be adjusted upward, real time markets are vulnerable
to sudden unexpected shocks. A good example of this would
be the "Flash Crash" of May 2010, when $1 trillion in stock
market value was erased in just 15 minutes.

(CONT….)
 High Tangible Asset Value: Unlike stocks and, to some
extent, bonds, an investment in real estate is backed by
a high level of brick and mortar. This helps reduce the
principal-agent conflict, or the extent to which the
interest of the investor is dependent on the integrity and
competence of managers and debtors.
 Attractive and Stable Income Return: Over a 30 year
period from 1977 to 2007, close to 80% of total U.S. real
estate return was derived from income flows. Real
estate is also attractive when compared with more
traditional sources of income return. The asset class
typically trades at a yield premium to U.S. Treasuries
and is especially attractive in an environment where
Treasury rates are low.
9

(CONT….)
 Portfolio Diversification: Real estate has a low, and in
some cases, negative, correlation with other major asset
classes. This means the addition of real estate to a
portfolio of diversified assets can lower portfolio volatility
and provide a higher return per unit of risk.
 Inflation Hedging: Real Estate stems for the positive
relationship between GDP growth and demand for real
estate. It tends to maintain the purchasing power of
capital, by passing some of the inflationary pressure on
to tenants and by incorporating some of the inflationary
pressure, in the form of capital appreciation.
10

HUGE TICKET SIZE TO ENTER REAL ESTATE
MARKET
 The ticket size of real estate private equity (PE) deals has
increased by a sharp 70% in the last three years, an indication
of gradually increasing confidence in the sector. Data from
Cushman and Wakefield, however, shows that surge in
investments has been restricted to the commercial segment.
Deal sizes have increased on an average from Rs 200 Cr. in
2013 to Rs 336 Cr. in H12016; while the commercial segment
has attracted transactions averaging Rs 700 Cr., in the
residential segment, these have averaged just Rs 200 Cr.
 Knight Frank estimates residential sales rose annually by 7%
in the past year. The off take in the commercial segment,
however, has been higher at 12% annually, hitting an all- time
high in 2015. Blackstone, for instance, has accumulated large
portfolio of 30 million square feet in the past four years.
11

HUGE TICKET SIZE TO ENTER REAL ESTATE
MARKET (CONT…)
 However, Cap rates have fallen somewhat from
10% to 8%, in the past couple of years which
means office buildings have become more
expensive.
 Nevertheless, Neeraj Sharma, partner, Grant
Thornton, said ballooning deal sizes are the result
of predictable revenues.
12

ADD SOME REAL ESTATE TO YOUR
PORTFOLIO
 Real Estate for Institutional Investors:
The permanent allocation of real estate capital comes
with some hurdles. First and foremost, it is capital
intensive. Unlike stocks that can be purchased in small
increments, commercial real estate investments require
relatively large sums, and direct investment often results
in lumpy portfolios and inordinate risks in either location
or by property type.
Managing a real estate allocation requires
significant resources relative to traditional investments.
The same advantages that institutions gain from real
estate funds can be achieved by retail investors through
REITs, REIT exchange-traded funds (ETFs) and real
estate mutual funds. 13

PORTFOLIO (CONT…)
 Retail Investors
Direct Investment: This strategy relates to investors
directly selecting specific properties. The great advantage in
this strategy is control. Direct ownership in property allows for
the development and execution of strategy and direct
influence over return.
Real Estate Investment Trusts (REIT): REIT shares
are private and public equity stock in companies structured as
trusts that invest in real estate, mortgages or other real estate
collateralized investments.
Real Estate Mutual Funds: Real estate mutual funds
invest primarily in REIT stocks and real estate operating
companies. They provide the ability to gain diversified
exposure to real estate with a relatively small amount of
capital. Creating an exposure to a broad base of mutual funds
can also reduce transaction costs and commission relative to
buying individual REIT stocks. 14

PORTFOLIO (CONT…)
15

IS REAL ESTATE A GOOD WAY TO GENERATE
STRONG RETURN FOR RETIREMENT?
“Absolutely. Having a reasonably steady, and a
mostly predictable, income stream is the Holy Grail
for retirees. This is why investors love real estate.
You’ve heard it time and time again: Cash Is King.
It’s most certainly a cliché, but its resonance
becomes reality with real estate, particularly with
this simple modification: Cash In Hand Is King.”
16

STRONG RETURN FOR RETIREMENT?(CONT….)
Here’s why:
 Protecting Your Principal: Real estate opportunities
offering current “cash on cash” returns (a metric used to
describe the return you are generating on your initial
capital contribution annually) should have enough cash
to pay timely distributions and to pay all the expenses of
operating and growing the bottom line.
Rental income- The theory is simple: the property owner
diligently sifts through applicants to find great tenants,
and as a result, the investor can more often than not
expect to receive current payments.
17

 Buildings Make Sense: No one really knows for
certain what actually drives a stock price up or
down. But investing in real estate provides a
greater degree of control over potential appreciation
because there are things the owner can do to boost
a property’s value and its income.
A good real estate investment starts with these
qualities: a solid structure, an advantageous
location, creditworthy tenants, ordinary (not
excessive) repairs, annual or scheduled rental rate
hikes and the ability to pay the mortgage every
month. 18

 Work With an Adviser: In order to invest in real estate for
retirement with the least risk and the potential to generate the
highest returns, you must tap into specialized knowledge and
skill. The best way to do this is to speak with a Registered
Investment Adviser (RIA) with experience investing in real
estate.
An RIA is a fiduciary for you, doesn’t take an upfront fee and is
dedicated to guiding you through the jungle of real estate
options, which include private placements, private real estate
investment trusts (REITs), limited partnerships and other
securities.
Don’t be afraid to tell your RIA what you want to get out of a
real estate investment. Outlining your goals will help put you
on the path to identify the best strategy for your retirement.
Currently, real estate investments in emerging, secondary, or
tertiary markets , can provide an 8% return if done correctly.
19

 Talk Taxes, Too: strategic tax planning is one of
the most overlooked topics for investors new to the
real estate landscape.
Talk about things like whether to invest through
your RIA and how depreciation can help you keep
more of the rental income you collect after taxes.
Key discussions with an investment adviser and a
tax adviser can go a long way toward finding the
most appropriate real estate investments for the
retirement income you desire.
20

IMPACT OF REAL ESTATE IN GLOBAL
MARKET
 Increase in prices of inputs, due to inflation effecting all
areas of economy like steel, cement etc.
 Increase in home loan, interest rates resulting into
additional EMI burden on borrowers.
 Reduction in salaries & layoff resulting into reduced
demand for Real Estate.
 Demand-Supply imbalance.
 Forced correction in price.
 Reduction in commercial rentals.
 Project stagnancy
 Slow down in infrastructure projects.
 Difficulties to raise funds.
 Loss of jobs.
 Shortage of skill workers. 21

MARKET (CONT….)
US SUBPRIME CRISIS
22

SUBPRIME MORTGAGE CRISIS EXPLAINED
23
 Up until 2006, the house market in
the unites states was flourishing
due to the fact that it was so easy
to get home loan.
 Individuals were taking on
subprime mortgages, with the
expectations that the price of their
home would continue to rise & they
would able to refinance their home
before the higher interest rate were
to go into effect. 2005 was peak of
subprime boom at this time 1 in 5
mortgages was subprime.
 However, the housing bubble burst
& housing prices had reached their
peak they were now on a decline.
 The bursting of any housing
bubble would be expected to
have a negative effect on
economy for 2 reasons:
 Home construction is a
economic activity & decline
in home construction would
reduce GDP.
 The decrease in home
prices would also reduce
household consumption
due to wealth effect.
As mentioned previously
most of the losses were
suffered by financial system
not by home owners.

MARKET (CONT….)
24
Impact On India
o The foreign bank started unloading their holding in
Indian equity resulting in fall in the stock price and
weakening the domestic currency.
o Hitting the IT enabled services since majority firms
derive 75% of revenue from US.
o Manufacturing sector has to ramp up scale
economies & improve productivity and operational
efficiency.
o The near recession situation in the US has lead to
loss of demand for Indian exports & hence there is
a loss of export earnings in India.

BIG DADDY’S OF REAL ESTATE
25

RISK INVOLVED IN REAL ESTATE
26

WHY RISK PREDICTIONS CAN GO WRONG?
 If the financial crisis has taught investors anything, it’s that even really
smart people don’t see every risk coming. A big part of the problem is
that most investors—even sophisticated professionals—base their
projections for future risk on what happened in the past, says Liang
Peng, assistant professor with the Leeds School of Business at the
University of Colorado at Boulder. “They don’t assume the correlation
between risk and return can change over time,” .
 Another difficulty, is that investors often spend their time focusing on less
critical variables like cap rates and hold periods, but overlook key—but
difficult to predict—risk factors that can have a much greater impact.
 Analyzing critical factors such as vacancy rates, absorption, rent growth,
refinance rates, and expenses helps create a clearer picture of risk. So,
too, can finding indicators of potential macro risk that affect real estate.
 Peng – A property analyst’s findings: “ Commercial real estate risk is
positively correlated with GDP growth and the change in the credit
spread. Negative correlations occur with inflation, stock market volatility,
and the change in the credit spread over 10-year Treasuries.”
27

CURRENT SCENARIO
Residential Commercial
Supply 6979.42 1129.93
Absorption 5535.53 781.03
Unsold 1443.89 416.29
0
1000
2000
3000
4000
5000
6000
7000
8000
Supply
Absorption
Unsold
28
Above data is extracted from www.propequity.com and belonging period is 2010-2015
(inmillionsquarefeet)

CURRENT SCENARIO
Commite
d Supply
Ready
Supply
Under
Construc
tion
Residential &
Commercial
2727147 1831618 895529
0
500000
1000000
1500000
2000000
2500000
3000000
Residential & Commercial
Residential &
Commercial
29

WHAT’S THE CONCLUSION
 Despite abundant advertisements claiming that real estate investing
is an easy way to wealth, it is in fact a challenging business requiring
expertise, planning and focus. In addition, because the business
revolves around people, investors benefit in the long run by operating
with integrity and by showing respect to associates and clients.
 Real estate is a distinct asset class that is simple to understand and
can enhance the risk and return profile of an investor's portfolio. On
its own, real estate offers competitive risk-adjusted returns, with less
principal-agent conflict and attractive income streams. It can also
enhance a portfolio, by lowering volatility through
diversification. Though illiquidity can be a concern for some
investors.
 Although retail investors can and should take into account home
ownership when conducting their portfolio allocations, additional,
more liquid investments in real estate might also be considered. For
those with the requisite trading skills and capital, REIT investing
provides access to some of the benefits of real estate investing
without the need for direct ownership. For others considering a
smaller allocation or for those that do not want to be saddled by asset
selection but require maximum diversification, real estate mutual
funds would be an appropriate choice. 30

Real estate - An Investment Vehicle

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