Real estate investment in India: the importance of exitsDecember 9, 2013 / By
“Begin with the End in Mind” – Steven Covey
Measured by peaks and troughs in performance, property cycles are often long in duration. And on the back of the volatility shown by the real estate sector in India during the past decade, the returns through capital appreciation in real estate investment aside, security of the invested capital has become a big priority. It is noteworthy to mention that prior to the Global Financial Crisis (GFC) in 2008, the macroeconomic scenario was of robust appreciation of the main indicators of price, absorption (sales) and supply (new launches and construction activity). However, the indicators showed a marked correction during the GFC and post-GFC. In such a scenario, entering the real estate investment is only a part of the story. Exiting the investment at the right time has become much more important in generating better returns, keeping in mind the length of property cycles.
In general, we see various exit approaches from investors pertaining to different holding times.
Some investors enter the market without having exit strategies chalked out beforehand. This increases the probable downside of return in a volatile environment, as many investors are quick to pick-up a good deal but not so good at knowing when to exit. In addition, many investors believe having one option for moving out is good enough. However, things do not always go as planned and one can easily miss an opportunity during the alteration of market cycles. Having multiple exit options, both long and short term, can benefit the investors with flexibility.
Those apart, every scenario of investing, including real estate, witness temptations. Many investors, entering at the right time either by knowledge or by sheer luck, experience tailwinds for their investments. However, exiting the investments not succumbing to the temptations of further appreciation after achieving a certain return could be the key to their success. Meanwhile there are instances where investors bought at the peak of the market and based on faulty temptations, were led towards a longer waiting time. Subsequently, any investment entry-exit can be classified based out of the following four scenarios and we have taken Mumbai South residential sub-market as an example.
Consequently, identifying the risk-taking appetite is the primary determinant in the current Indian context, as in general, higher risk contributes to a higher return and conversely, lower risk signifies a lower return. Amid the present volatility, it is advisable for a short-term investor to look for projects that are nearing completion or by developers with a good track record and sound financial credibility, as these lead towards easy exits with lower risks and moderate returns. Long-term investors, in addition, should look at the quality of the projects. Interestingly, even in this environment, there are lucrative incentives for speculators looking for high-risk opportunities. However, irrespective of the genre of investing, a thoroughly researched outlook with planned exit strategy would always grant an advantage in any market.