Currently, real estate investment is driven by commercial assets which include office space, industrial assets and land parcels suited for commercial use. Investors have been primarily focusing on this segment owing to higher appreciation compared to other investment channels. Although retail investors have been mostly interested in commercial assets, seasoned investors are now willing to look at alternative asset classes which include co-living developments, student housing and senior housing.
This change of mindset has resulted in bringing a big shift in the economy. We, as businesses need to accept this reality and redesign our models to address the present requirements and stay relevant in the future.
It is important to look at diversified asset classes in order to create an efficient portfolio. In real estate, selection of the product depends on the investment objective of the investor. Based on risk assessment and expected ROI, real estate products can be classified into following categories:
Rent yielding assets – – Most vibrant segment across investor profiles ranging from institution, UHNIs to retail investors. It includes office space, retail, hospitality, industrial (including warehousing) and rental housing. The annual yield varies between 6% - 10% depending on asset class, location and quality of assets and annual appreciation varies between 3% - 5%; the ROI (Rental Yield + Appreciation) is 9% - 15%. This type of investment is relatively low risk.
Growth assets- Historically, this investment type has provided windfall returns to the investors. Growth asset includes land and other opportunistic investments like discounted bulk buyout of residential products. Land investment is a long-term investment and has moderate to high risk. However, with good research investors can expect 30% -40% annual return on an average over the investment cycle of 10-15 years.
Fixed Return investment product- - Even though its rare nowadays, a decade back it was one of the most vibrant investment products preferred by retail/ wholesale investors. Investors used to buy a mainly residential or commercial assets at prelaunch phase at a guaranteed return from developer and used to get proportional asset as collaterals for their investment. The annual return for this type of investment is generally between 15% and 24%. However, over the last few years investors have been shying away from this investment due to the impact of demonetization, slow sales and nominal appreciation of capital values.
The future of real estate investment lies in rent yielding products. However, seasoned investors will invest into land and opportunistic investments as well. With REITs being listed, the investment will be primarily concentrated in tier I cities in India.