Category: Realty

“Most people do not realise how difficult the ice cream industry is. It is capital-intensive in nature with a long gestation period,” he says morosely. Top that up with a mediocre 2-3% net profit margin that most players in this industry, including Vadilal, bring to the table and the result isn’t as sweet as you’d expect. “It is so challenging that there is not too much money available to the promoters,” says Gandhi with a wry smile. What is available, though, is far from insubstantial — Gandhi’s income is not restricted to just his salary or dividend from the approximately 22% stake he holds in Vadilal Industries. “There is also some money that comes through partnership firms and royalty from the Vadilal brand,” he says, without giving away details.

And most of it, since the early 1980s, has been invested in land. More precisely, agricultural land. “People might think this is an unconventional kind of investment but it is one that has worked for the family. It started off as an experiment the first time and now this is a big part of our personal portfolio,” he says. It certainly is: land accounts for 80% of the Gandhi family portfolio, with the rest distributed in more predictable avenues such as FDs or cash, with equity being the smallest component. “Equity is a volatile investment and my mindset is not in line with that. Land is more stable and offers a steady return,” rationalises Gandhi

Gandhi’s views are just reflective of the state of the market that we find ourselves in: over the past five years, the Sensex has just about managed to yield around 16% return. As for the other asset classes, the recent National Spot Exchange fiasco has taken the sheen off commodities, while volatility has left investors with marked-to-market losses in fixed income as yields suddenly spiked when foreign investors pulled out money from the debt market. Against such a backdrop, the preference for real estate has continued, despite concerns of a bubble building up in the sector.

In the case of the Gandhis, at any point in time, the family owns at least 100 acres of agricultural land in Gujarat, at places such as Gota, Bardoli and Bavla. “We have sold about 10% of our holding to date for a reasonable return,” says Gandhi. “Reasonable” here is defined as 1.5 times the number of years the asset has been owned; that is, land held over a five-year period has given a return of close to eight times. The 10% that was sold was in the form of plots of 400-500 sq yards, apart from 15 fully constructed bungalows. Gandhi is no hurry to monetise the rest of his land holding. “It is not just about making money right away. This allows us the option of possibly looking at an area like property development at a later date. We want to keep our options open,” he says.

Gandhi is only one of the many wealthy entrepreneurs Outlook Business spoke with who were convinced of the merits of real estate, in one form or the other. Consider CK Ranganathan. “In the long run, I am convinced no asset class can beat real estate,” says the chairman and managing director of the Rs 1,000-crore FMCG rising star, CavinKare. As much as 95% of his personal wealth is in real estate, where Ranganathan prefers buying land to residential or commercial buildings. “Land offers the best returns,” he declares. The tilt towards this asset class came after he tried investing in stocks, financial instruments and commodities between 2005 and 2007. After the 2008 meltdown, the 52-year-old Ranganathan recalled his grandparents’ advice to him as a youngster. “They always advised me to buy land, and I decided that was the best thing to do. Asset allocation changed from 50% in stocks in 2007-08 to 95% in real estate,” he goes on to say. The remaining 5% is divided between gold and stocks.-from OutlookBusiness

In view of the slowdown, property is a poor sector for investment. Long term investors looking to buy property for post retirement self use or for holding periods of over 10 years can enter in select locations, cities and segments and look for bargains.
Certain general rules for real estate investment in a slowdown can be kept in mind.

1. In a bear market, one should select property in prime locations and not in peripheral locations, since prime locations will be the first to reverse price direction and will give the most sustained returns once the bull market returns
2. In a bear market, one should invest for the long term. For property, a time frame of 15 years or more is ideal.
3. Short term flipping for quick gains on leverage should not be attempted in bear markets. This technique is reserved for bull markets.
4. The most depressed prices in distress sales will be in luxury property and in plots. These will rise the most when the market turns. Deep pocketed investors with the ability to pick up the distress sale and holding through the uncertainties of the bear market will reap the maximal rewards. Deep pockets and lack of leverage will amplify returns in bear markets – thus bear markets make the rich even richer because they alone can afford to buy and hold. This is in contrast to bull markets where short term holding and leverage amplifies returns and risk takers benefit rather than long term holders.
5. The safest investment for middle class investors in a bear market is already built ready to register flats in the affordable segment in the main central areas of the city with existing infrastructure
Luxury property as a whole is better avoided for the year 2014. This is because prices are already high and it is better to wait for lower prices and for bargains to emerge. As the luxury flats booked by investors slowly get completed, investors will be ready to negotiate with bargain hunters.
Plots are also avoidable because of the existing high prices and the lack of performance in plots in the central areas of Gurgaon even during the bull market of 2010-2012. The higher prices for construction of builder floors on plots has made them expensive and out of reach for many. Buyers are also preferring to live in apartment complexes due to better security and amenities. As such, a changing preference of people over time makes it difficult to extrapolate previous price behavior of plots in the past 50 years. Waiting for better bargains but also actively looking for bargains would be prudent for property investors.

Property in the affordable range of 2500 to 5000 psf range will be the best segment for entry, for both end users and investors, due to limited downside.

The main requirement for a boom in property market is a recovery from the current industrial recession. Until the industrial revival generates more well paying jobs, the real estate market cannot revive. The industrial revival is likely to happen in the next 2 years based on cyclical factors, however the strength of the industrial revival is crucially dependent on the general elections of 2014. A strong decisive pro-industry government will cause a dramatic improvement in the industrial climate and a sustained stock market performance followed by an equally sustained real estate market performance will follow. A fractured mandate will cause a weak revival but consequent turbulence in exchange rates can have unpredictable results on real estate price inflation. High imported inflation, escalation of raw material prices, escalation of capital cost etc can have paradoxical results in the real estate market by making the cost of new construction prohibitive. Existing property which is registered may therefore become more valuable while under construction projects might be abandoned.

-from Indian RealEstateForum