5 tips to reduce real estate investment risk
Indian real estate is experiencing a spectacular comeback as demand explodes in most major Indian cities. Favorable market conditions, bullish economic sentiments and lower interest rates further align the market in a positive direction.
The acceleration of the real estate market has also renewed the interest of investors. Alongside homebuyers, investors are also drawn to the high-volume market in search of better returns.
However, it should be noted that like the financial markets, real estate is not entirely risk-free. There are many types of risks such as market, economic and developer risk in the industry. To make safe investments and enjoy higher returns, it is essential that investors have a prudent risk management strategy in place.
Below are the 5 tips that can help you systematically manage and reduce risk in real estate investments.
Market analysis: It is important to analyze and scrutinize the market before making any substantial investment. Investors should learn about supply and demand, potential demand, future market trends, etc. to access the probable appreciation. Likewise, they should also know about the status of physical infrastructure, upcoming projects in the vicinity, business/IT parks, catchment areas, social infrastructure, etc. A thorough market analysis can offer a lot of valuable information to investors.
Geographical diversification: If someone is investing in more than one property, it is advisable to invest in multiple regions rather than focusing on just one market. In a country like India, despite global trends, regional disparities exist. Therefore, investing in multiple geographies can mitigate risk and ensure a higher return on investment. Before investing in multiple geographies, it is advisable to do the research properly and have an overview of the track record of the different geographies.
Diversification of assets: Similar to geographic diversification, it is also worth investing in many assets to reduce market risk and economic risk. Put the money in assets such as residential, commercial, retail, storage, etc. optimizes overall yields. This will spread the risk across the assets and the overall impact of any possible downtrend in a particular category will be limited.
Developer Credibility Check: Over the past 5-7 years, developer credibility has become essential. There are countless examples that have shown how projects from non-credible developers are blocked. Although big developers also fail, choosing a credible name can significantly reduce the risk.
Just like the credibility of the developer, it is important to check the functional dimension of the project, which includes utility, floor plan, design, specifications, etc. A good quality project will attract more investors, buyers and tenants, thus offering better returns.
Evaluate your time horizon: Real estate is a tangible asset and requires a lot of patience. Unlike the stock market, you need a medium to long term horizon to reap the benefits of investing. If one can retain ownership for a long time, the risk of falling cyclical traps can be largely avoided and one can divest at the right time. Therefore, it is advisable to access the risk appetite and assess the time horizon.
(By Atul Goel, MD, Goel Ganga Group)