The real estate sector is quite complex and every real estate project undergoes a series of steps before the final finished product is ready for use. Each of these stages in a real estate project requires capital and each stage of investment has its own characteristics. Here are some options for investors to consider to time their real estate investment.
Early-Stage Real Estate Projects
An early stage project is a project which is typically in the planning stage where it is yet to obtain the necessary plan approvals from the appropriate governing authorities that would qualify under the category of an early stage project.
Features of an early-stage project
- A project’s life cycle in a country like India, from the time it is conceptualized to the time that it is completed and handed over, could well last around five to seven years, of which more than half the timeline is spent in the pre-plan-approval stages.
- A well-planned and thoroughly assessed investment into a project at this early stage in its life cycle has the advantage that one gets to invest at a price significantly lower than the prevailing market price. The foremost benefit of doing so in the right city and location is that it has the potential to generate a superior return on investment.
- The intrinsic value of the investment gets unlocked over a longer duration at two stages, at the time of the launch once the project obtains plan approvals and once again at the time of handover of the project. At the same time, early stage investors need more patience as the investment may take a while to mature and become liquid.
- This is especially important due to the relatively longer timelines involved attributable to changes in land regulations, regulatory laws, and dependence on government agencies to process paperwork.
- The investor also needs to consider well-funded projects and developers to ensure the project is able to obtain financial closure.
- With early stage projects one should also be prepared for the investment to not generate income in the first half of the overall duration.
- With adequate research and sufficient time on hand to allow them to perform, early-stage investments could very well outperform most asset classes in the long term, along with a discounted entry price augmenting the return on investment.
- These projects though may not be accessible to a retail investor directly and the simple and safe manner to invest in them would be through a market regulator-registered alternative investment fund (AIF) and real estate portfolio managers who offer curated investment options.
Mid-Stage Real Estate Projects
A project that has obtained all the necessary plan approvals as well as registration with the regulatory authorities such as Real Estate Regulatory Authority (RERA), along with some part of the construction work having commenced would be a good example of a mid-stage real estate project.
Features of a mid-stage project
- A retail investor would have direct access to invest in such a project as most of them would go through an open market launch process to enable retail transactions.
- While the price one gets at the time of the launch may not be as low as an early stage investment, it still is quite attractive considering the market price that it could potentially end up with at the time of completion.
- Since these projects are not dependent on external factors such as plan approvals, they are relatively less risky compared to early stage ones.
- These are suited to investors who want a superior rate of return compared to nominal GDP rates and have moderate to low-risk appetite and an investment duration of three to five years.
- While residential projects at these stages are easily accessible to retail investors, mid-stage commercial projects may have a very high entry investment ticket-size.
- These investments, too, may not start generating regular income immediately, but will do so after a couple of years of investment, closer to the time of completion.
Late-Stage Real Estate Projects or Completed Projects
The least risky investments in real estate are in projects that have been completed or are on verge of being completed and are called late-stage projects. To use an equity analogy, this is similar to investing in blue chip stocks: less uncertainty and therefore more predictable albeit lower expected returns.
Features of a large-stage project
- The advantage one has while looking at projects in this stage of development is that he or she needn’t wait for the delivery of such projects, and can then focus completely on the more important factors such as location, design, quality, amenities, and price. Investors also get a touch and feel experience of the executed quality and finishes of such projects.
- You should expect prices of completed projects to be much higher than early and mid-stage projects.
- If the location and product type are selected wisely, completed projects have excellent potential to appreciate further and ensure investment portfolios to be inflation proof. This is especially true of projects in prime locations where new and additional land parcels may not be available, thus enabling well designed high quality projects to further appreciate in time post completion.
- These are also suited to investors seeking regular incomes from their investments. While investors may find completed residential projects more easily accessible, one can invest in commercial sector projects through other routes such as REITs and similar financial instruments.
At the outset investment in real estate may seem complicated and long drawn. However, an investor will find the investment journey to be quite pleasant and simple, given that he or she thoroughly researches the investment and is also cognizant of the timelines involved.
A simple rule of thumb would be that early stage real estate investments are suited to investors expecting high double digit returns on investment but also are willing to be more patient and accept a wider range of outcomes.
Mid-stage projects are suited to those who want better than average returns and are willing to accept some level of variability in outcomes, and have about three to five years on hand, and late stage projects are suited to investors who want inflation-proof investments with average but predictable returns.
With the right asset allocation and provision of sufficient time, one can definitely use real estate investments to build a solid foundation to one’s portfolio. As Mark Twain once famously said “buy land, they aren’t making it anymore”.