A lot of people who read my blog think I am against real estate. Far from it. I believe a lot of money can be made in real estate – surely greater than gold and debt instruments. Surely less than a nice portfolio of equities.
However to make money in real estate the following conditions should exist:
– you have to be really big enough to influence policies, take delivery, buy land build houses and then sell, …- which means it is a BUSINESS opportunity, not just a buy and hold or buy and rent kind of business.
– Builders, lenders, etc. will of course make the ‘lion’s share’ of the property appreciation.
– I would love to buy a portfolio of offices, houses, clubs, theaters, malls, shops, hotels, gym. However this kind of a portfolio is possible only if REIT was to be introduced.
– I would love to invest in a fund which has a portfolio of all the above and allows me to invest money on a monthly SIP – where I should also get the benefit of price fluctuation.
– the fund itself should be leveraged, so that I do not have to leverage. However if the fund is not leveraged, I should have money available to leverage and buy more units.
Will all this happen?
NO. NOT in the current way that things are. Here is a nice real life incident:
One very huge fund manager did a small experiment. He called 3 valuation companies and asked them to prepare a valuation report on one property in a tier 2 city. He got a variation of 20% between the highest and the lowest valuation.
Then he sent 3 valuation experts from MUMBAI to do the same job….
He told one of them…he ‘likes the place’ and wants to buy
He told one of them…a friend is in trouble and he wishes to help him by giving a loan
He told the 3rd guy – I wish to sell the place.
He got a 25% variation and the bias was also captured in the price!
No REIT cannot happen until the back end is cleaned up. Look at the share market the price discovery mechanism and trade execution are both very good and in place for a long time..
The real estate back end is in real bad shape ….so REIT cannot come to India in a quick time frame.
So what to do? In my case, I stay away. Because the best thing to do in a bubble is to stay away.
Why is it a bubble in Mumbai? Because there is no one person capturing all the events in an index, rents are no where near the bank interest rates….all these are scary…so my defense is ‘stay away’ beyond the one house required to live in.
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