Fri. Apr 19th, 2019

Investment in real estate assets should be strategic, not emotional

Scores of people hold multiple real estate assets in their portfolio with no cash flow. Deeper analysis reveals these realty investments were led by emotions, rather by strategic analysis

Whatever be the product, marketers have always sold three things — Fear, Hope and Greed. Real estate has been no exception.

The two most worrying problems plaguing the stakeholder in the Indian real estate industry are — inventory pile up and devaluation of an asset or non performing investment.

I have been deliberating about the cause and remedy of this phenomenon over the past three years, and I have found out that investors haven’t exactly captured three essential factors in real estate, which are (a) Tax efficient monetization, (b) Capture value from the real estate assets (c) Impact of new policies on overall efficiency of investments.

Let us admit that this prolonged slowdown wasn’t exactly predicted by many investors, and that the emotion led investment strategy into a few low hanging segments like residential, retail, commercial and land weren’t exactly backed by a strategic entry and exit plan. Most times, multiple agencies have represented real estate projects or products to the investor community and the purchased assets haven’t formed a part of the ‘Managed assets & wealth’.

Policies make a big impact on real estate investment and conclusively put to rest the speculative element from investments, and also de-risks both the investor and investee. Said that, it also becomes the way forward for unlocking the value from non-performing real estate assets.

To exemplify the point, let us take the example of Delhi and critically re-look at three policies which have been notified, or are likely to be notified within the month of July’ 2018.

Notification titled “Regulations for enabling the planned development of Privately owned lands”
You would recall that there has been a lot of debate on the sealing and unauthorized developments within Delhi, with the highest policy making bodies and the Supreme Court involved in the same. There are private lands in Delhi, pre-1962 master plan, which hitherto were not eligible to be monetized or developed by the land owning entity/ individual. When these assets are read with the Master Plan Delhi-2021 and the building bye laws they can now be unlocked to their full value.

“Notification for allowing permitted changed land use in Industrial plots for non Industrial use”
With the change in policies, lack of investment into hard manufacturing projects, environmental norms and escalating costs and price of Land, many industrial houses and owners find it unviable to manufacture in Delhi. Said that, they still hold on to Real Estate Industrial assets which can be monetized for non industrial use. Why not re-look at the asset portfolio dispassionately and create a profitable manufacturing business.

Land-pooling & Farmhouses in MPD 2021
DDA recently concluded the public hearing against the 735 objections and suggestions towards Land Pooling in Delhi. This is also significant against the suggestions put forth by the Supreme Court in the matter of sealing as well as Urbanization of Delhi to accommodate the demand for more than a million housing units to be developed.

If you ask the wish list of any investor into real estate, it would be to monetize and own assets simultaneously; to derive tangible and intangible benefits.

If one scans through the business newspaper headlines, it is evident that the importance of “Monetization of Real estate assets” has dawned on Governments, Organizations and high net-worth individuals (HNIs) who are critically and scientifically (not emotionally) re-evaluating their real estate portfolio to convert them into performing assets, and also improve cash flows. Be it Air India, or Indian Railways or any PSU (public sector unit), traditional manufacturing organizations or neo-service entities, or even individuals who have an ‘inventory pile-up’ on their portfolio.

Culturally, Indians have been attuned to believe that monetizing real estate assets is akin to ‘selling family silver’, which, sadly is untrue. Agreed, to sell inherited assets is an emotional decision, but to re-arrange one’s assets following a more scientific methodology is a strategic call. After all, if you’re tracking the performance of your financial assets on a periodic basis, why not real estate? How often have we been emotional about re-arranging our financial portfolio for better cash flow management and enhanced business profits?

Mark Twain had famously remarked “Buy Land, they don’t make it anymore.” He said buy, possess; not hoard. Monetizing assets is about allowing your portfolio to perform at an optimum potential, rather than rest on a residual value.

We have always advocated that the best time to buy is during the ‘low tide’; said that, the best time to monetize is when newer opportunities emerge. And there are multiple new avenues which seek the smart investor who dares to look beyond the traditional avenues and products in real estate.

An interesting facet emanating out of an informal gathering of real estate investors is that “there are MNC brokers, there are domestic brokers, but hardly any ‘customer centric’ consulting organizations with deep rooted understanding of both finance and real estate, who work towards the success of the venture, rather than the transaction.”

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