REAL ESTATE INVESTMENT.

1. AN INTRODUCTION ON REAL ESTATE INVESTMENT.

The term ‘real estate’ is defined as land, including the air above it and the ground below it, and
any buildings or structures on it. It is also referred to as realty. It covers residential housing,
commercial offices, trading spaces such as theatres, hotels and restaurants, retail outlets,
industrial buildings such as factories and government buildings. Real estate involves the
purchase, sale, and development of land, residential and non-residential buildings. The main
players in the real estate market are the landlords, developers, builders, real estate agents,
tenants, buyers etc. The activities of the real estate sector encompass the housing and
construction sectors also.

Chances are, when you think about investing in real estate the first thing that comes to mind is
your home. For many people, their home is the single largest investment they will ever make .
The real estate sector in India has assumed growing importance with the liberalization of the
economy. The consequent increase in business opportunities and migration of the labour force
has, in turn, increased the demand for commercial and housing space, especially rental housing.
Developments in the real estate sector are being influenced by the developments in the retail,
hospitality and entertainment (e.g., hotels, resorts, cinema theatres) industries, economic services
(e.g., hospitals, schools) and information technology (IT)- enabled services (like call centres) etc.
and vice versa.

The real estate sector is a major employment driver, being the second largest employer next only
to agriculture. This is because of the chain of backward and forward linkages that the sector has
with the other sectors of the economy, especially with the housing and construction sector. About
250 ancillary industries such as cement, steel, brick, timber, building materials etc. are dependent
on the real estate industry.

Indian Real estate sector is one of the most thriving industries of the present times. And if
industry experts are to be believed, the prospects of Indian property market is going to attract all
major investors to this vast land of opportunities in coming years thereby giving a boost to
already raising foreign direct investment.

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The Government of India has taken positive initiatives by offering the best in terms of real estate
investment, by altering its FDI policies from time to time. With better infrastructure and
availability of world class facilities, property in Indian prominent cities are the most sought after
proposition. No wonder, this part of the globe i.e. India will emerge as the ultimate place for
investment in contemporary retail, residential or commercial space in coming years.

The boom in the sector has been so appealing that real estate has turned out to be a convincing
investment as compared to other investment vehicles such as capital and debt markets and
bullion market. It is attracting investors by offering a possibility of stable income yields,
moderate capital appreciations, tax structuring benefits and higher security in comparison to
other investment options.

With property boom spreading in all directions, real estate in India is touching new heights.
However, the growth also depends on the policies adopted by the government to facilitate
investments mainly in the economic and industrial sector. The new stand adopted by Indian
government regarding foreign direct investment (FDI) policies has encouraged an increasing
number of countries to invest in Indian Properties.

India has displaced US as the second-most favored destination for FDI in the world. The positive
outlook of Indian government is the key factor behind the sudden rise of the Indian Real Estate
sector - the second largest employer after agriculture in India. The growth curve of Indian
economy is at an all time high and contributing to the upswing is the real estate sector in
particular. Investments in Indian real estate have been strongly taking up over other options for
domestic as well as foreign investors.

Why Invest In Indian Real Estate?

Flying high on the wings of booming real estate, property in India has become a dream for every
potential investor looking forward to dig profits. All are eyeing Indian property market for a
wide variety of reasons:

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• It’s ever growing economy which is on a continuous rise with 8.1 percent increase witnessed in
the last financial year. The boom in economy increases purchasing power of its people and
creates demand for real estate sector.

• India is going to produce an estimated 2 million new graduates from various Indian universities
during this year, creating demand for 100 million square feet of office and industrial space.

• Presence of a large number of Fortune 500 and other reputed companies will attract more
companies to initiate their operational bases in India thus creating more demand for corporate
space.

• Real estate investments in India yield huge dividends. 70 percent of foreign investors in India
are making profits and another 12 percent are breaking even.

• Apart from IT, ITES and Business Process Outsourcing (BPO) India has shown its expertise in
sectors like auto-components, chemicals, apparels, pharmaceuticals and jewellery where it can
match the best in the world. These positive attributes of India is definitely going to attract more
foreign investors in the near future.

The relaxed FDI rules implemented by India have invited more foreign investors and real estate
in India is seemingly the most lucrative ground at present. The revised investor friendly policies
allowed foreigners to own property, and dropped the minimum size for housing estates built with
foreign capital to 25 acres (10hectares) from 100 acres (40 hectares). With this sudden change in
investment policies, the overseas firms can now put up commercial buildings as long as the
projects surpass 50,000 square meters (538,200 square feet) of floor space.

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2. THE MAIN FACTORS OF RESIDENTIAL REAL ESTATE

INVESTMENT & COMMERCIAL REAL ESTATE
INVESTMENT.

RESIDENTIAL REAL ESTATE INVESTMENT

The main factors that are driving demand in the residential segment are described in more detail
below:

• Changing demographics and increasing affluence: India’s demographics have been

impacted by large increases in employment opportunities, people in the earning age bracket (25
to 44 year olds) and higher salaries. Such factors are increasing disposable incomes and driving
demand for new residential and retail properties.

The table below shows historic and projected annual growth rates for different segments of
India’s population, classified by levels of annual income. The figures highlight that strong
growth is expected especially in the higher income segments. For example, the number of
households with annual incomes of between Rs. 2 million and Rs. 5 million per year, Rs. 5
million and Rs. 10 million per year and in excess of Rs. 10 million per year is expected to
increase in size by 23%, 26% and 28%, respectively, between financial year 2002 and 2010, as
illustrated by the table. These higher income segments of India’s growing middle class are
expected to provide a strong impetus for the continued development and growth of the Indian
real estate sector.

• Large segment of the population economically active: India’s growing population in the
earning age bracket is recognized as a key driver of growth in housing demand. The size of
India’s main working age group, 25 to 44 year olds, has increased over the last two decades.
According to CRIS INFAC estimates, as of 2005, approximately 28.2% of India’s population
was in this age bracket. This figure is expected to rise to approximately 30.6% by 2025, an
increase of approximately 5.5 million people each year, which could translate into a further 2.75

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million new households per year. Also, the average age of a home purchaser has fallen from 42
to 31 years old (Source: CRISINFAC Retail Finance).

• Shift in consumer preferences from renting to owning houses: Due to the changing
demographic profile in India, there has been a steady decline in the portion of households living
in rented premises. To a certain extent, this may be attributed to rising income levels. However,
with fewer properties available to rent today and an increase in the rents being charged to
tenants, consumers have increasingly been investing in property. Factors such as the increase in
the standard of living of consumers and the greater availability of financing for consumer
expected to fuel a further decline in the number of households renting premises (CRIS INFAC
Annual Review on Housing Industry,)

COMMERCIAL REAL ESTATE INVESTMENT.

• Commercial locations in India: Over the past five years, locations such as Bangalore,
Gurgaon, Hyderabad, Chennai, Kolkata and Pune have established themselves as emerging
business destinations that are competing with traditional business destinations such as Mumbai
and Delhi, especially with respect to their commercial real estate sector. These emerging
destinations have succeeded in matching their human resources base with necessary skill sets,
competitive business environments, operating cost advantages and improved urban
infrastructure. The current relative position of the urban growth centers in India can be
summarized either as (i) mature, (ii) in transition, (iii) emerging, or (iv) tier III destinations.
These classifications are described below:

• Mature Destinations: Locations such as Mumbai and Delhi have a metropolitan character and
have consistently been traditional business destinations with a favorable record in attracting
investment opportunities. However, factors such as increasing operating costs and constraints on
the availability of land may impede such areas from sustaining a high rate of growth in their
respective business districts. Therefore, commercial real estate growth is expected to be focused
in the suburbs and other peripheral locations of these cities. For example, with respect to
Mumbai, commercial real estate growth is expected to be focused in areas north of central
Mumbai and Navi Mumbai and to the east of the city center.

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• Destinations in Transition: Locations such as Bangalore and Gurgaon have human resource
potential, quality real estate and operating cost advantages. As such, these locations are best
positioned to attract investment in the near future. Lack of infrastructure is currently the main
inhibiting factor precluding robust growth in these areas.

• Emerging Destinations: Locations such as Pune, Chennai, Hyderabad and Kolkata offer cost
advantages, well developed infrastructure, supportive city governments and minimal restraints on
the supply of real estate. While the number of large occupiers in these locations has yet to reach
optimum levels, these locations attract a large amount of real estate investment. Growth in these
emerging destinations is predominantly led by the expansion and consolidation plans of
corporations in the IT and ITES sectors.

• Tier III Cities: Locations such as Jaipur, Coimbatore, Ahmedabad, and Lucknow have a large
talent pool combined with low cost real estate. As such, businesses in the technology sector have
demonstrated a growing interest in these locations as they seek to expand their operations.

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3. REAL ESTATE INVESTMENTS AND REAL ESTATE

MARKETS.

For a long time, commercial real estate has been a relatively under-researched market, certainly
by comparison to the major financial asset classes. This may seem surprising given the size of
the market, but probably reflects data issues caused by the characteristics of the asset class
(largely traded in private markets, with inaccessible private data and often poor quality public
data). Up until the early 1990s, benchmarks were only available in a very limited number of
countries (the U.S., U.K., Canada, Ireland, Australia, and New Zealand). In terms of major
markets, benchmarks only really existed for the U.S. and U.K. markets. From the 1990s, new
benchmarks emerged for many countries. The Investment Property Databank (IPD), a major
provider of commercial real estate benchmarks, now reports on 14 European markets, and three
outside Europe (Australia, Canada and South Africa). Consultation releases are also available
for Japan and Belgium, and development projects well advanced in Korea and New Zealand.

There is a much wider acceptance that real estate investment decision making needs to be
informed. In particular, the linkages between real estate and financial markets need to be
analyzed. There are many more quality journal articles, and also books, monographs, industry
publications and reports. That research has become more international in nature, with the
development of global and regional real estate conferences, both academic and trade-related.
These developments parallel the growth of international real estate service providers (particularly
following the wave of international merger and acquisition activity in the late 1990s and early
2000s) who provide both a “one stop shop” for international investors and a growing
standardization in terminology and statistics. In addition, international data providers, interest
groups and trade associations (such as EPRA and INREV) have appeared improving the quality
of research.
There are no official statistics on the overall size of the commercial real estate market. The
capital value of the global commercial real estate market has been estimated to be as little as
$8,000 billion1 and as large $22,000 billion2 – the differences in part reflecting whether or not

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corporate real estate is included, but also whether or not “core” assets only are considered3. This
compares to an estimated market capitalization of $49,000 billion for global stock markets and
$60,000 billion for bond markets (SIFM, 2006). However, investment in real estate is more
complex. The European Public Real estate Association, EPRA (2007) estimate that $1,525
billion is in listed real estate securities – 8.8% of their estimated total real estate market of
$17,329 billion and around 3.1% of the equity market. AME Capital (2006) produce a higher
estimate of the market capitalization of the global real estate equity market at around
$1,900billion, 32% of which is in Asian markets, 31% in North America and 25% in Europe.
39% of the companies listed were REITs or equivalent – a proportion likely to grow as more
countries introduce REIT legislation.
The table below sets out allocations to real estate by pension funds in six countries studied in an
international project by the Pensions Real Estate Association (PREA) of the United States4. As
can be seen, there is considerable variation, but three of the countries have allocations of 10% or
more. The U.K.’s allocation is understated, since stakes in property companies have been
counted as equity rather than real estate investments. Explanations for the differences across
countries include history, culture, pension fund regulation, but also the structure of the market in
terms of other participants and the tenure choice decisions of both commercial real estate and
housing.

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4. ADVANTAGES AND DISADVANTAGES OF REAL

ESTATE INVESTING.

Real estate investing is an investment strategy where an investor purchases property in order to
earn a profit. In most cases, the investor will either rent out the property, or improve on it in
order to resell it at a higher cost than it was purchase for. Real estate investing can be riskier than
other investments since property cannot usually be sold quickly.

Advantages Income Stream

If the property is easily convertible to rental units, the owner of the property can earn a steady
income stream in the form of rent. Depending on the geographical location the property is
located in, the earnings can be quite significant. For example, urban city centers or towns with
colleges and universities tend to offer the highest income streams because the demand for rental
units is always high.

 Security

Owning property can offer the investor a sense of security because the value does not tend to
fluctuate as much as other assets such as stocks and bonds. However, this does not mean that the
investor will always break even or earn a profit on their investment. Although housing prices do
not tend to fluctuate in the short term, they may increase or decrease in value in the longer term.
Therefore, it is important for the investor to thoroughly research the area before making a
purchase.

 Self Occupation

Another reason why many investors are attracted to investing in real estate is because the
property can be utilized by the investor. They can either live on the property while they fix it up,
or they can be a live-in landlord and earn an income stream at the same time by renting out the
other rooms.

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 Tax Shelter

Since tax laws on income properties vary depending on your jurisdiction, you should always be
sure to thoroughly research it beforehand. However, it is very common for taxes on any gains to
be deferred until you sell the property. For example, if a house appreciates in value from
$250,000 to $300,000, the investor will not be required to pay the taxes on the extra $50,000
until the property is sold.

Disadvantages Legal Difficulties

Investing in real estate has the potential of being very confusing because it requires that you are
fully aware of the laws in each jurisdiction that you own property. Some jurisdictions may even
enforce land ceilings which can make the investment risky. The legal difficulties can become
much more complex if the investor is investing in commercial real estate.

 Maintenance Cost

The cost of maintaining the property can cause the investor to lose money on the investment. In
larger cities, property taxes can be so high that it will be very difficult to resell the house at a
higher value. If the owner of the property is renting out the units, maintenance costs can take
large chunks out of the income stream. If the owner does not personally know the tenants before
renting out the units, they run into the risk of renting the space out to someone who will not take
care of the unit, causing the owner to put large sums of money into repairs. Furthermore, other
costs such as electricity and heating will also add up.

 Property Taxes

Before investing in real estate, the investor should always factor property taxes into their
valuation of the property. In larger urban cities, property taxes can be significant and may cause
the investor to lose a big chunk of their profit. Property taxes will vary depending on which city
or state the property is purchased in. Therefore, the investor should always consult with city
officials before investing in property.

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5. CHALLENGES FACING THE REAL ESTATE SECTOR

• Highly regional reach of existing players: Considering the peculiar features of the real estate
sector such as the differing tastes of population across various geographies, difficulties in mass
land acquisition on unfamiliar terrain, absence of business infrastructure to market projects at
new locations, wide number of approvals to be obtained from different authorities at various
stages of construction under the local laws, and the long gestation period of projects, most real
estate developers in India tend to hover in tried and tested areas where the conditions are most
familiar to them. As a result, currently there are very few players in the country, who can claim
to have pan-national area of operations.

• Majority of market belonging to unorganized segment: The Indian Real Estate Sector is highly
fragmented with the disorganized segment comprising of the small builders and contractors
accounting for a majority of the housing units constructed. As a result, there is a lesser degree of
transparency in dealings or sharing of data across players.

• Demand dependent on many factors: A challenge that the real estate developers face is
generating the requisite demand for the properties constructed. The factors that influence a
customer’s choice in property is not restricted to quality alone, but is dependent on a number of
other external factors including proximity to urban areas, amenities such as schools, roads, water
supply which are often beyond the developer’s sphere of reach. Also, demand for housing units
is also influenced by policy decisions relating to housing incentives.

• Increasing Raw Material Prices: Construction activities are often funded by the client who
makes cash advances at different stages of construction. In other words, the final amount of
revenue from a project is pre-determined and the realization of this revenue is scattered across
the period of construction. A big challenge that real estate developers face is dealing with
adverse movements in costs. The real estate sector is dependent on a number of components such
as cement, steel, bricks, wood, sand, gravel and paints. As the revenues from sale of units are
pre- decided, adverse price changes in any of the raw materials directly affect the bottom lines of
the developers.

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• Interest Rates: One of the main drivers of the growth in demand for housing units is the
availability of finance at cheap rates. Rising interest rates may dampen the growth rate of
demand for housing units.

• Tax incentives: Interest payment on housing loans are tax deductible and it is one of the major
factors influencing demand. The phasing out available tax incentives could affect the existent
demand for housing units.

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6. TYPES OF REAL ESTATE INVESTMENTS

Following are the types of real estate investments that are available for investors:
Residential real estate investment
This is the simplest type of real estate investment where you invest in a residential
property, such as houses, vacation houses, town houses and apartment buildings and a person
or family pays a rent to live-in that property. The duration of their stay is decided in a rental
agreement with the party.

Industrial real estate investment

This investment consists of a car wash, storage units and other special purpose properties that
generate income from those who temporarily use these facilities. For example, these investments
generate cash from fee and service income streams, such as placing coin-operated
vacuum cleaners at a car wash garage to increase the return on real estate investments.

Commercial real estate investment

As the name suggests, this investment consists of office buildings. You can use your savings to
construct building with individual offices and earn a rent by leasing them out to
small business owners and companies.

Retail real estate investment

It involves investing in strip malls, shopping complex, and other retail outlets where you earn by
receiving rent from tenants of the store. n some cases, you can also choose to receive a
percentage of sales made by the tenant in addition to the base rent so that a property can be kept
in a good condition.

Mixed- used real estate investment

It combines any of the above mentioned investments into a single protect and offers
diversification which can reduce the risk of loss to a minimum. These real estate investments are

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suitable for those investors who have significant assets as they have a built-in diversification
prospect.

Real estate investment Trusts (REITS)

It is a trust, corporation or association that as an agent in a real estate investment or real estate
mortgage. They trade like bonds and stock in the market and have a well diversification portfolio
of underlying real estate mortgages and real estate property investments.

Office Property
Offices are the "flagship" investment for many real estate owners. They tend to be, on average,
the largest and highest profile property type because of their typical location in downtown cores
and sprawling suburban office parks.

At its most fundamental level, the demand for office space is tied to companies' requirement for
office workers, and the average space per office worker. The typical office worker is involved in
things like finance, accounting, insurance, real estate, services, management and administration.
As these "white-collar" jobs grow, there is greater demand for office spaces.

Returns from office properties can be highly variable because the market tends to be sensitive to
economic performance. One downside is that office buildings have high operating costs, so if
you lose a tenant it can have a substantial impact on the returns for the property. However, in
times of prosperity, offices tend to perform extremely well, because demand for space causes
rental rates to increase and an extended time period is required to build an office tower to relieve
the pressure on the market and rents.

Multi-family residential property

Multi-family residential property generally delivers the most stable returns, because no matter
what the economic cycle, people always need a place to live. The result is that in normal
markets, residential occupancy tends to stay reasonably high. Another factor contributing to the
stability of residential property is that the loss of a single tenant has a minimal impact on

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the bottom line, whereas if you lose a tenant in any other type of property the negative effects
can be much more significant.

For most commercial property types, tenant leases are either net or partially net, meaning that
most operating expenses can be passed along to tenants. However, residential properties typically
do not have this attribute, meaning that the risk of increases in building operating costs is borne
by the property owner for the duration of the lease.

A positive aspect of residential properties is that in some countries, government-insured

financing is available. At the expense of a small premium, insured financing lowers the interest
rate on mortgages, thereby enhancing potential returns from the investment.

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7. CHARACTERISTIC OF REAL ESTATE INVESTMENT.

PHYSICAL ECONOMIC LEGAL OTHERS

*Immobility *Interest and rights *Varying Lack of public

legislations and law information on the
*Size *Decentralized price
market *Complicated
*Heterogeneous transaction Information only
*Hedge against procedures available at the
*Durability or inflation
perpectuality authority and hardly
* statutorial charges accessible by public
*Large transaction
*Long development costs or invisible
or complexion time Broucher price may be
*Supply lag different from real
*Property price
*management *Cyclical values

The income return from real estate is directly linked to the rent payments received from tenants,
minus the costs of operating the property and outgoing mortgage/financing payments. So, you
can understand how important it is to keep your property as full as possible. If you lose too many
tenants, you won't have sufficient rents being paid by the other tenants to cover the building
operating costs. Your ability to keep the building full depends on the strength of the leasing
market - that is, the supply and demand for space similar to the space you are trying to lease. In
weaker markets with oversupply of vacancies or poor demand, you would have to charge less

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rent to keep your building full than in a strong leasing market. And unfortunately, if your rents
are lower, your income returns are lower.

Capital appreciation of a property is determined by having the property appraised. (We discuss
the appraisal process further in chapter 7, but for now you should just know that an appraiser
uses actual sale transactions that have occurred and other pieces of market data to estimate what
your property would be worth if it were to be sold.) If the appraiser thinks your property would
sell for more than you bought it for, then you've achieved a positive capital return. Because the
appraiser uses past transactions in judging values, capital returns are directly linked to the
performance of the investment sales market. The investment sales market is affected largely by
the supply and demand of investment product.

The majority of the volatility in real estate returns comes from the capital appreciation
component of returns. Income returns tend to be fairly stable, and capital returns fluctuate more.
The volatility of total returns falls somewhere in between.

Other Characteristics

Some of the other characteristics that make real estate unique as compared to other investment
alternatives are as follows:

No fixed maturity

Unlike a bond which has a fixed maturity date, an equity real estate investment does not
normally mature. In Europe, it is not uncommon for investors to hold property for over 100
years. This attribute of real estate allows an owner to buy a property, execute a business plan,
then dispose of the property whenever appropriate. An exception to this characteristic is an
investment in fixed-term debt; by definition a mortgage would have a fixed maturity.
Tangible
Real estate is, well, real! You can visit your investment, speak with your tenants, and show it off

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to your family and friends. You can see it and touch it. A result of this attribute is that you have a
certain degree of physical control over the investment - if something is wrong with it, you can try

fixing it. You can't do that with a stock or bond.

Requires Management
Because real estate is tangible, it needs to be managed in a hands-on manner. Tenant complaints
must be addressed. Landscaping must be handled. And, when the building starts to age, it needs
to be renovated.

Inefficient Markets
An inefficient market is not necessarily a bad thing. It just means that information asymmetry
exists among participants in the market, allowing greater profits to be made by those with special
information, expertise or resources. In contrast, public stock markets are much more efficient -
information is efficiently disseminated among market participants, and those with material non-
public information are not permitted to trade upon the information. In the real estate markets,
information is king, and can allow an investor to see profit opportunities that might otherwise not
have presented themselves.

High Transaction Costs

Private market real estate has high purchase costs and sale costs. On purchases, there are real-
estate-agent-related commissions, lawyers' fees, engineers' fees and many other costs that can
raise the effective purchase price well beyond the price the seller will actually receive. On sales,
a substantial brokerage fee is usually required for the property to be properly exposed to the
market. Because of the high costs of "trading" real estate, longer holding periods are common
and speculative trading is rarer than for stocks.

Lower Liquidity
With the exception of real estate securities, no public exchange exists for the trading of real
estate. This makes real estate more difficult to sell because deals must be privately brokered.

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There can be a substantial lag between the time you decide to sell a property and when it actually
is sold-usually a couple months at least.

Underlying Tenant Quality

When assessing an income-producing property, an important consideration is the quality of the

underlying tenancy. This is important because when you purchase the property, you're buying
two things: the physical real estate, and the income stream from the tenants. If the tenants are
likely to default on their monthly obligation, the risk of the investment is greater.

Variability among Regions

While it sounds cliché, location is one of the important aspects of real estate investments; a piece
of real estate can perform very differently among countries, regions, cities and even within the
same city. These regional differences need to be considered when making an investment,
because your selection of which market to invest in has as large an impact on your eventual
returns as your choice of property within the market.

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8. TOP 50 FIRMS IN REAL ESTATE INVESTMENT.

1 The Blackstone Group
2 Starwood Capital Group
3 Lone Star Funds
4 Colony Capital
5 LaSalle Investment Management
6 Tishman Speyer
7 The Carlyle Group
8 Goldman Sachs Real Estate Principal Investment Area
9 Brookfield Asset Management
10 MGPA
11 Morgan Stanley Real Estate Investing
12 CBRE Global Investors
13 Westbrook Partners
14 AREA Property Partners
15 Angelo, Gordon & Co
16 Prudential Real Estate Investors
17 Shorenstein Properties
18 CapitaLand
19 Fortress Investment Group
20 TA Associates Realty
21 Oaktree Capital Mangement
22 Bank of America Merrill Lynch Global Principal Investments
23 Walton Street Capital
24 Northwood Investors
25 Perella Weinberg Partners
26 Lubert-Adler Partners
27 AEW Global
28 Beacon Capital Partners
29 Orion Capital Managers
30 Alpha Investment Partners
31 DRA Advisors
32 KSL Capital Partners
33 ARA Asset Management
34 Rockpoint Group
35 Niam
36 Hemisferio Sul Investimentos
37 Hines
38 GI Partners
39 Cerberus Capital Management
40 GTIS Partners
41 Invesco Real Estate
42 Crow Holdings
43 CIM Group
44 Rockwood Capital
45 Berkshire Property Advisors
46 Harrison Street Real Estate Capital
47 GE Capital Real Estate
48 Kayne Anderson Real Estate Advisors
49 Spear Street Capital
50 Stockbridge Capital Group

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9. BUYING AND OWING REAL ESTATE

we presented the investment selection matrix, which outlines your alternatives when choosing
the kind of real estate investment to make. You can choose to invest in the following types:
public equity, private equity, public debt and private debt. In this chapter, we will expand on
these structures with a particular focus on equity real estate investments.

Public Equity
Public equity is made up of real estate securities such as standard equity REITs or publicly
traded real estate operating companies. Because investments are traded on a stock exchange, they
tend to exhibit return patterns that are similar to equities, even though the underlying assets are
real estate.

At any point in time, these public securities will be trading at a discount or a premium to their net
asset values (NAVs), meaning that the value of the company is different than the sum of the
underlying real estate values. This occurs as a result of the stock market valuation of these
securities, which incorporates things like investor sentiment and psychology. It is important to be
aware of this characteristic when making an investment in a real estate security because such
investments can perform very differently than the underlying real estate that these public
companies own.

One of the benefits of buying a security is the relative ease of acquisition. You buy it in the same
manner as you would buy a stock - phone your broker, make the order and pay the relevant
commission. You also achieve good liquidity with these investments, because they can be sold
on short notice into the market with none of the usual delays that take place in the private
market.

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Private Equity
Private equity real estate investing is the traditional ownership method. If you own a home,
you've participated in this market.

There are a number of things to keep in mind when looking for deals, here are a few tips to
follow:

The key to locating investment opportunities is to be in touch with the various deal sources. You
should get to know various real estate brokers and dealers. It also helps to have a network of
other real estate owners, so you can keep up with an ever-changing market. You can find deals in
unexpected places, such as your banker, lawyer, mortgage broker or through foreclosure records.
Over time, your reputation becomes very important in maintaining a reliable flow of investment
opportunities. If you are a person that people want to deal with, opportunities will come to you
easier. Take your time to find the investment that meets your desired characteristics. You'll be
better off waiting for the right investment than rushing into a questionable one. Look for
positive fundamentals in all of your investments. Always ask yourself what drives tenants to
want to be in the building you're considering, and what could happen in the future to affect the
desirability of the property. Consider things such as quality of tenants, building configuration,
location, condition and ability to finance. When you find the right deal, always complete a
financial analysis to make sure the returns meet your investment criteria. If you need financing,
speak to a lender or a mortgage broker to determine what type of mortgage is available, and then
include the financing in your financial model.

It is also worthwhile to complete a thorough due diligence on your prospective investment. This
process can include having reports completed on the physical and environmental condition of the
property, and having an appraisal performed. Your lawyer will be able to obtain a variety of
search results and will assist in examining the title. Depending on the complexity of the
purchase, there are many other tasks that may be required.

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There are many costs related to due diligence and the purchasing process, so be sure these costs
become part of your financial analysis. Some typical costs include lawyer's fees, financing fees,
appraisal costs and other administrative fees.

Don't think that your job is done after your purchase; here are some things you need to consider

after purchasing your piece of real estate:

You should determine how you are going to manage the investment. Will you do it yourself or
hire a manager? Remember that cost accounting will be required. Tenant relationships are
critical, so always respect their requirements and maintain a working business relationship with
them. Remember that if you hire a property manager, they are not managing the long-term
strategy of the property, unless it is specifically agreed upon that they will handle that role. It is
up to you to ensure the long-term viability of the investment and to instruct the property manager
with respect to strategy, such as redeveloping or selling the property. The decision to sell is as
important as the decision to buy, but remember that there will be trading costs associated with
Completingasale.PublicandPrivateDebt

A common example of public debt is a commercial mortgage-backed security (CMBS). A

CMBS is a pool of mortgage loans that are assembled by a lender, and then sold in tranches to
the public market. As borrowers make their regular mortgage payments, the proceeds are pooled
together and then are paid to the owners of the debt securities in a priority dictated by the rating
of the security.

The security's rating is determined by a third party rating service such as Moody's,
Fitch, Standard & Poor's and Dominion Bond Rating Service. The rating process involves the
agency reviewing the pool of mortgage loans, including an examination of the
underlying collateral assets, to determine the quality of cash flow that is likely to be derived from
those loans.

If the loans are of a very high credit quality, a larger proportion of the mortgage pool will be
assigned an AAA rating. The rating categories are consistent with bond rating categories, so for

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instance the A tranche is subordinate to the AAA tranche, and the buyer of the B-piece will be
subordinate to all of the more senior tranches. Usually, all the holders of the more senior
securities must receive their principal and interest payments before the subordinate pieces
receive theirs. As such, tranches with lower credit quality are riskier, but have higher return
potential.

Because each tranche of the loan pool has a different set of risks, maturity, sensitivity to changes
in interest rates and return, your investment decision should be based on the type of exposure
you require for your portfolio. It should also incorporate your assessment of the interest
rate environment and any likely changes. CMBS securities can be purchased from a broker of
such securities. It is recommended that you consult with an advisor prior to purchasing such
securities because they can behave differently depending on the interest rate environment.

Private debt is not so much purchased as it is issued. That is, if you would like to invest in
private debt, you should provide mortgage financing to an owner of real estate. In return for your
mortgage loan, you will receive a fixed or floating interest rate, and a priority claim on the real
estate assets in the event of default on the loan. A common example of investing in private debt
is a vendor take-back mortgage (VTB). If you own a commercial property and sell it to a
purchaser, you could choose to accept all or part of the payment over time. Just like a
conventional mortgage received from a financial institution, the purchaser would pay interest on
the borrowed funds over the length of the term, and you would register your claim to receive the
payments on the title to the property.

Another alternative is to make a contribution into a private mortgage pool, which is a pool of
capital that is invested in a variety of mortgages. Such an investment would require diligence to
determine its risk, because there is no third party rating agency to depend upon. A benefit of a
mortgage pool versus a VTB is that a default of one mortgage will have less of an impact on
your investment if it is combined with other mortgages to balance the risk. To purchase units in a
private mortgage pool, you should contact an investment manager who assembles such pools, or
a broker involved in the private mortgage market.

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10. RETAIL SECTOR FACILITATING REAL ESTATE

INVESTMENT GROWTH.

Apart from the IT and ITES industry influencing the Indian real estate sector, India is also
getting into the knowledge based manufacturing industry on a large scale. Retail, one of India's
largest industries, has presently emerged as one of the most dynamic and fast paced industries of
our times with several players entering the market. The contemporary retail sector in India which
is reflected in sprawling shopping centers and multiplex- malls is also contributing to large scale
investments in the real estate sector with major national and global players investing in
developing the infrastructure and construction of the retailing business.

Accounting for over 10 per cent of the country's GDP and around eight per cent of the
employment retailing in India is gradually inching its way toward becoming the next boom
industry. And if industry experts are to be believed, the prospects of both the sectors are mutually
dependent on each other. Another emerging trend in real estate sector in India is investment in
the hospitality or hotel industry. The exceptional boom in inbound tourism and the IT sector has
also led to an unprecedented shortage of rooms, with hotels all over the country witnessing their
highest-ever occupancy rates.

SEZ’s-The emerging investment option : Moreover, as real estate sector expands beyond the
city limits with government promoting industrial belts, real estate developers are eyeing special
economic zones (SEZ’s) as an extension of their business. Several upcoming special economic
zones are also expected to provide the momentum to the commercial office space development in
related area where the land comes cheaper; and a SEZ developer is entitled for tax exemptions
like a 10-year corporate tax holiday. On the whole, Indian real estate sector is slated to mark the
growth to $40-50 billion in the next five years. Also, India is witnessing developments of hi tech
cities, a trend that has been embraced by most Indian cities. Further, India's improving image, as
a corporate base for Asian markets and strong growth opportunities in emerging sectors such as
financial services, pharmaceuticals, telecommunications, and biotechnology will also boost
demand and broaden the occupier base.

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FDI-Inviting Real Estate Investments: FDI, popularly known as Foreign Direct Investment is
encouraged in the country. Prior to 2005, only NRI's and PIO's were allowed to invest in the
housing and the real estate sectors. Foreign investors other than NRIs were allowed to invest
only in development of integrated townships and settlements either through a wholly-owned
subsidiary or through a joint venture (JV) company along with a local partner.India fully opened
doors for FDI in real estate in 2005.It helps to boost the national economy. FDI is encouraged in
the following sectors in India:-

• Development of Hotels

• Travel and Tourism Industry

• Hospitality

• Development of Township

• Development of Commercial Real Estate

• Infrastructure development

• Construction of Resorts

• Constructing Educational institutions and recreational sites

• SEZ (or Special Economic Zones)

Not surprisingly, most foreign investors have aimed India in a big way, largely through joint
ventures. Along with curtailing the risk factor, it provides the participating companies an exit
route. The Government of India's liberalization and economic reforms programme encourages
industrial policy reforms that have reduced the industrial licensing requirements, removed
restrictions on investment and expansion, and facilitated easy access to foreign technology and
FDI. Increased inflow of investments arising out of flexible FDI policies is sure to have a direct
and positive impact on the real restate scenario of India. More investments mean more job
opportunities and more jobs means more workforces. This has created a huge demand and supply
gap in housing in India. The booming IT industry has also resulted in a large section of young

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investors who with high-income jobs chose real estate as an investment option. The potential of
India's property market has a revolutionizing effect on the overall economy of India as it
transforms the skyline of the Indian cities mobilizing investments segments ranging from
commercial, residential, retail, industrial, hospitality, healthcare etc. But maximum growth is
attributed to its growth from the booming IT sector, since an estimated 70 per cent of the new
construction is for the IT sector. Not surprisingly, most foreign investors have aimed India in a
big way, largely through joint ventures. Along with curtailing the risk factor, it provides the
participating companies an exit route.

The Government of India's liberalization and economic reforms programme encourages

industrial policy reforms that have reduced the industrial licensing requirements, removed
restrictions on investment and expansion, and facilitated easy access to foreign technology and
FDI. Increased inflow of investments arising out of flexible FDI policies is sure to have a direct
and positive impact on the real estate scenario of India. More investments mean more job
opportunities and more jobs means more workforces. This has created a huge demand and supply
gap in housing in India. The booming IT industry has also resulted in a large section of young
investors who with high-income jobs chose real estate as an investment option.

FDI permitted 100% under Automatic Route. FDI Projects Allowed

• Townships

• Housing

• Built-up Infrastructure

• Construction Development which would include but not limited to housing, Commercial
Premises, Hotels, resorts, Hospitals etc

FDI Current Scenario

• Foreign direct investment (FDI) in India's real estate and housing market jumped 80 times
between 2005 and 2010 from Rs Rs 171 crore to Rs 13,586 crore of the total 1,614 projects in

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which foreign investors have put in money since 2005, 422 were cleared by the Reserve Bank of
India's Mumbai office, followed closely by 316 in Delhi

Guidelines for FDI application in Indian real estate

Minimum Area

• In case of development of serviced housing plots, 10 hectares (25 acres)

• In case of construction-development projects, built-up area of 50,000 sq m.

• In case of a combination project, any of the above two conditions

Investment

• Minimum capitalization for wholly owned subsidiaries - US$ 10 million for JV with Indian
partners - US$ 5 million (to be brought in within 6 months of commencement of business)

• Original Investment cannot be repatriated before a period of three years from completion of
capitalization.

• The investor may exit earlier with prior approval from Foreign Investment Promotion Board
(FIPB).

Time frame & rules

• At least 50 per cent of the project to be developed within five years from the date of obtaining
all statutory clearances.

• Investor cannot sell undeveloped plots - where roads, water supply, street lighting, drainage,
sewerage and other conveniences are not available.

• Project to conform to the norms and standards of Local Body concerned

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• All necessary approvals including layout plans, infrastructure facilities as per the prevailing
laws needs to be procured

• The Local Body concerned which approves the layouts etc. would monitor compliance by the
Developer

Hotels & Tourism, Hospitals & SEZ Projects

• The Hotels & Tourism, Hospitals and SEZ Projects have benefits not attracting conditions as to
Minimum Area of Development, Capitalisation and Time frame

• However, FDI in SEZ will be subject to SEZ Act and Policy of the Department of the
Commerce in this regard.

FDI not allowed

As per paragraph 5.1. (h) and 5.23.10 of Chapter V of DIPP which expressly prohibits in Real
Estate business or Construction of Farm Houses. It should be noted that FDI in any form is
prohibited in Real estate business. FDI is not allowed in a partnership or proprietary concern if it
is engaged in real estate business. Even investment by a Non Resident India or a Person of Indian
Origin in such partnership or concern is not allowed.Real estate business means buying and
selling of real estate or trading in Transferable Development Rights (TDR’s).

FII Vs FDI

• Real Estate projects can attract FDI up to 100 percent, subject to certain conditions. Previously
company not willing to meet the stringent project conditions, the FII route was used to overcome
the rules and bring in foreign investment. All the company needs to do was get FIIs that are
registered with SEBI to invest in the IPO • Though RBI has objected towards the IPO
investment through FII where the conditions are not fulfilled however still FII are been done
through the secondary market

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NRI Investment in Real estate

The real estate sector in India is becoming an increasingly attractive option for investments
promising good returns, for both Indians and NRIs. Given the money/risks involved, the
importance of making an informed decision and investment that is in compliance with rules
governing the purchase / sale / other modes of transfer of immovable property cannot be stressed
enough. An NRI is a citizen of India resident outside India. PIO refers to an individual (not being
a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or
Bhutan), who (a) at any time held an Indian passport; or (b) who or either of whose
parents/grandparents were citizens of India by virtue of the Constitution of India or the
Citizenship Act, 1955. Acquiring immovable property in India by person resident outside India is
regulated in terms of Section 6(3) (i) of the Foreign Exchange Management Act (FEMA), 1999
as well as by the regulations contained in Notification issued by RBI viz. Notification No
FEMA. 21/2000-RB as amended from time to time. The person resident outside India is
categorized as Non- Resident Indians (NRIs).

Acquiring property NRIs and PIOs are permitted to purchase residential and commercial
property in India without seeking any prior permission and without any limitations on the
number or size of such properties. When purchasing a residential/

commercial property, an NRI/PIO can make requisite payments only from funds that have been
remitted to India through normal banking channels or from funds held in an
NRE/NRO/FCNR(B) * account maintained in India. They are not permitted to make payments
against such purchase in foreign currency or by traveller’s cheques or any other mode except
those specified by RBI.

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11. MAJOR FOREIGN INVESTORS IN REAL ESTATE

SECTOR IN INDIA

• Emmar Properties, of Dubai

• UK-based construction major, Laing O'Rourke (LOR)

• Morgan-Stanley Real Estate

• Vancouver-based Royal Indian Raj International Corporation (RIRIC)

As the real estate investments open up opportunities for the associated fields like Home Loans
and Home Insurance, a number of global insurance companies have shown interest in the sector.
This include companies like Cesma International from Singapore, American International Group
Inc (AIG), High Point Rendel of the UK, Colony Capital and Brack Capital of the US, and Lee
Kim Tah Holdings to name a few. As the Indian real-estate companies are in the expansion
process to meet the demand for homes, offices and retail space as overseas companies are
allowed in more industries and faster economic growth boosts middle-class incomes in the
country. This has also generated the need for funds for investment into the realty sector creating
the need for organized finance.

As India opens up its market to foreign players there is bound to be a competitive edge to give
quality-based performance for customer satisfaction which will consequently bring in quality
technology and transparency in the construction and realty sector. And the ultimate winner
irrespective of all is surely to be the buyers.

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12. CONCLUSION

Real estate investments fall into one of the four following categories: private equity, public
equity, private debt and public debt. Your choice of which one to invest in depends on the type
ofexposureyouareseekingforyourportfolio.
You can invest in either income-producing properties or non-income-producing properties. Any
leased property is income producing, and vacant properties are non-income producing. You can
still earn a capital return on a non-income producing property, just as you would on an
investmentinahome. The major types of investment properties are offices, retails, industrials and
multi-familyresidentialproperties.
Real estate can produce income (like a bond) and appreciate (like an equity).
Real estate is tangible, so it requires ongoing management. On the other hand, you also have an
increased ability to influence the performance of a single investment as compared to other asset
classes.
Some of the benefits of adding real estate to a portfolio include: diversification, yield
enhancement, risk reduction and inflation-hedging capabilities. However, real estate also has
high transaction costs, can be difficult to acquire and it is challenging to measure its relative
performance.
Buying real estate requires substantial due diligence to ensure that you're getting what you
expectafteryouclose. The way to determine the value of your property (other than actually selling
it) is to have it appraised by an accredited appraiser.

Real estate serves various function and purpose –

• Place of stay
• Investment
• Security for financing
• Personal safety and security

• Real estate exposed to various risk, thus it is important to take transfer of risk measure.

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13. WEBLIOGRAPHY

Web Sources:

 www.google.com
 www.wikipedia.com
 www.investopedia.com
 www.scribd.com
 www.infibeam.com
 www.yahoo.com

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