Real estate biz gets rental ramp-up

MUMBAI: Wealth managers may warn you against investing in real estate, thanks to falling property prices over the last eight years, but a select group of high net worth individuals (HNIs) and housing finance companies (HFCs) seem to have proven them wrong.
The average yield from commercial properties over the last year has outstripped the returns from equity or gilts.
Individuals and firms alike have figured out how to get returns of over 13 per cent (see table) from this asset class that has the disadvantage of low liquidity.
The gameplan is simple: Taking advantage of the increased demand for office premises on rent (which now comprises over 90 per cent of all commercial real estate transactions), especially from gung-ho information technology and business process outsourcing companies, investors are buying prime commercial office space and then entering into leave-and-licence agreements with a lengthy lock-in period.
Mumbai, Pune, Gurgaon, Delhi and Bangalore are seeing the bulk of such transactions, which offer high yields. In fact, in some transactions, like the Technopolis project in Andheri (East), Mumbai, the net return to the investor has been as high as 17 to 23 per cent.
According to a report by international property consultants Knight Frank India, ‘‘Among the HFCs, HDFC and ICICI Home Finance are aggressively investing in properties, mostly in southern India, where values are reasonably low and the scope for capital appreciation is high.’’
Knight Frank India chairman Pranay Vakil says returns from investments in property will far outweigh returns from other asset classes in the near future. ‘‘We believe there is a significant market of investors with surpluses of between Rs 2 crore and Rs 20 crore who are looking for investment avenues. These include trusts and the untapped non-residents, as well as overseas corporate bodies,’’ he adds.
When real estate mutual funds are permitted in the country, transactions in commercial properties for leasing purposes are expected to increase dramatically.
‘‘When the mutual funds are floated, they can pay out annual dividends on the rental income and that will boost the business,’’ says HDFC general manager (technical services) K.G. Krishnamurthy. The housing finance company has invested about Rs 230 crore, comprising 9 per cent of its net worth, in real estate, and is looking at shuffling its property portfolio this year. HFCs are permitted to invest only 10 per cent of their net worth in real estate.