Real Estate Portfolio Management

Accommodation Times News Services

sanjaychaturvediBy Dr. Sanjay Chaturvedi

Introduction:

Real Estate Portfolio management is different from normal portfolio management because of nature of business and sector specific norms. It is also because there is no regulator nor any specific index. Real Estate is not having industry status in India hence regulatory frame work required for nay industry is not present.

In view of the above one’s acumen to capitalise and maximise the wealth has overruled financial tools like IRR and some of the researched based formulas. For any portfolio management the prime objective is to have maximum yield and appreciation of assets. Real Estate is dominated by market players. Since there is a huge demand for every piece of it, suppliers have their monopolistic approach in the sector.

For any Portfolio Manager it is direct competition with the supplier i.e. Builders and Developers. These manufacturer not only construct and sell but also behave as intermediaries between investors and actual buyers or occupants.

The Process

Stage -1 Planning

Stage -2 Implementing

Stage -3 Monitoring

An investment process is a plan of action for implementing an investment philosophy. To be successful, an investment process must be highly disciplined and consistently applied over time. At the very core of the investment process is the need to choose from among alternative investments. Selecting assets for an investment portfolio requires the investor to understand the risk-return trade off for the alternative investments available.

In planning investments, which more than likely are tied to some goal or a number of goals, the first step is to determine an appropriate asset allocation, given the individual risk tolerance, investment time horizon, financial big picture and the nature of the goal for which a person is investing.

Once we have determined our asset allocation strategy, we turn our attention to selecting individual asset for each portion of our portfolio. This can be one of the most interesting and challenging parts of the investment process.

An investment process for active investment management requires ongoing and regular monitoring, as well as feedback on performance.

Understanding Risk and Returns

Let us find answers to question like “How do investors measure expected return and risk?” “ What are the risk and return characteristics of various major asset classes?” “ What are some various alternative risk measures?”

Measuring Return :

In term of return, the first measurement to look at is the historical retrun on an investment over a given single time period ( or holding period return).

Single period holding period return :

If an investor commits Rs.100 to an investment at the beginning of the period and receive back Rs.120 at the end of the period, what is the return for the period? The answer is the holding period return. The period during which investors own an investment is called its investment holding period. The return for that period is the holding period return (HPR), or holding period total return. The HPR is defined as the percentage change of the investment for this period. I this example, the HPR for this single period is calculated as follows.

 

Rs.120 – Rs.100

HPR =      ——————————–  = 0.20 = 20%

Rs.100

 

As this simple formula suggest, the HPR can be positive, Zero, or negative. An HPR greater than zero reflects an increased value in the investment for the period; an HPR of zero indicates that the investment value remained unchanged for the period; and an HPR less than zero indicates a loss.

The holding period in the example just cited can be a month, a quarter, a year, 2 years or any other time period. In order to compare alternative investments with varying holding period, investors typically need to evaluate returns on an annual basis. ( In general, annual HPR can be computed by “Annual HPR = (1+HPR)1/n -1.)

Example 1 :

An investment that starts with Rs.100 is worth Rs.150 after a 2 year holding period.

 

Rs.150-Rs.100

Annual HPR = ( 1 + ——————)1/2 -1 =1.51/2   – 1 = 22.47%

Rs.100

Example 2 :

 

An investment that starts with Rs.100 is worth Rs.110 after a 3 months period

 

 

Rs.150-Rs.100

Annual HPR = ( 1 + ——————)1/0.25 -1 =1.51/0.25  – 1 = 46.41%

Rs.100

Since Real Estate price do not fluctuate within a year, the above calculations for annualising HPR assume a constant annual return, as well as compounding from period to period.

Average Historical Multi-period Returns:

Over a number of years, any given investment will likely to have good years with high positive returns, flat years with low positive or zero returns and even bad years with negative returns. While investors should analyse each of these returns , they also need some summary measurement to analyse the investment’s performance over time.

Risk Measurement of expected and historical Returns :

Risk means uncertainty about future rates of Returns. Volatility or Standard Deviation is a popular risk measurement that quantifies how much a series of investment returns varies around its mean or average. With this risk measurement, investors can judge the range of returns that our investment is likely to generate in the future.

The Key indicator :

Like we have it for stocks and now for commodity also, Real Estate do not have any index. BSE’s Realty Index and NHB’s Housing Index may be taken into consideration for market trend but real trend can be followed in the public domain like classified of newspapers, new project ads etc.

Keeping in an eye on supply side is a good idea since supply normally effect the trend in real estate. For example Mumbai will soon have 19000 odd dilapidated structure’s redevelopment, Salt Pan Land, Mill Land, and land availability after repeal of ULC Act in Maharashtra.

Second basic point is affordability. To what extent a buyer can afford a property, is the question which will answer the highest point for a particular location.

There are reasons for investment. One of them is keeping an asset for life long yield. Second for appreciation. And third for Tax planning. The first one being followed by an individual besides some of them wants to invest for appreciation also. Second type is mainly followed by institutional investments like Sector Specific Mutual Funds. Third again by individuals who wants to save on taxes and built an asset.

Portfolio management applies for all of them except for keeping an asset for lifelong. The only aim for it is to gain regular income and yield. Hence optimisation of yield is the main objective. It all depend on how you find a best occupier and keeping the relation well within the purview of Law of Land.

For appreciation and short term margin trading, real estate is best bet when it is under construction stage because from purchasing land till completion stage the time period is normally 18 months and in that stretch many investors and actual users invest. Hence exit is easy. It is difficult to exit at completion stage since you will be competing with the builder himself.





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