In this emerging scenario caused by Covid 19, there are opportunities as well all challenges. The
opportunities are highlighted in bold on social media, WhatsApp, newspapers, etc; high lighting the offers
compared to the huge challenges. The situation, either way, warrants a relook and new data points to be considered to avoid any accidents. I believe each crisis presents some unique opportunities be it in prices or payment flexibility, basically resulting in net savings to the buyer who can seize such opportunities. Just like ‘Investment in capital markets is subject to market risks’ I would like to apply some of my learnings of being in capital markets for over 15 years to real estate.
- Value Traps
According to Saurabh Mukherjea, the author of Coffee Can Investing, the biggest myth followed by Indian capital market investors is, ‘higher the risk higher the return’, while all one needs to do to create wealth is buying quality franchises and holding on for a longer-term, and then, there may be greater chances of generating returns instead of treating investment as Russian roulette.
Real estate investing is no different with over 3000 developers! Yes, 3000 real estate developers in Karnataka alone. The chances of buying the wrong property increase exponentially. The RERA has bought some transparency, process, but the law is still in a nascent stage and we need to
see lot more data to assess how unorganized players or fly-by-night players are weeded out of the system. Under such a scenario, it would be prudent to avoid value traps (projects not selling otherwise but are bundled into a lot of schemes wherein a client is locked into buying) and stick to growth players (players who are skin in the game and have delivered consistently) and more importantly have been in the business for a long period.
- Look beyond P&L
A classic mistake made by investors is when an erstwhile company is going through bad times and there are question marks on the quality of the company itself which reflects in the stock price correction and continuous news flow reflecting things aren’t looking good. Eg: As per Nithin Kamath of Zerodha, YES BANK has been one of the biggest wealth destroyers for its clients, with over 7 lakhs clients holding the stock (the stock declined from Rs.500 to Rs.5) and over 2 lakh clients having lost 59% in their account!
Real estate too has seen multiple such instances, where if an investor can avoid developers with some tainted past, negative news in the media repeatedly and thus avoid catching a falling knife. The focus on the balance sheet, i.e., how is the net debt of the company, the debt ratings, ears closer to the ground reality, advisors who are normally aware of any ongoing issues with a developer can help mitigate some part of the risk.
- Conglomerate vs others
Companies which are in multiple businesses, multiple locations are by default difficult to track and understand. Eg: Tata Motors which has its presence in 175 countries is a passenger as well as a commercial vehicle maker. Such a stock is highly risky for a novice investor who wouldn’t have the know-how on how the sales, cross-currency, and various business risks will pan out. This reflects in its stock price, which from around 600 in 2014 is hovering around 100 in 2020!
Real estate too has a lot of players from different cities venturing from their home turf looking to expand into newer geographies. While there are exceptions, in general, the experience of investors isn’t great as the power of the brand, resolving hurdles, property management (extremely crucial for a property) are better with a local branded developer over a developer who is in multiple locations. Also, multi-business developers are generally a red flag as a lot of inter-corporate lending happens which puts the business to unknown risks and is generally a red flag.
- Circle of Competence
Amidst a plethora of industries, companies listed in the stock exchanges, many of them are technical in nature like Pharma, Banking, chemicals, Oil&Gas, Tech, etc; compared to simpler sectors like Retail, FMCG, etc;. Each investor depending upon the background would have a circle of competence that offers them an edge over others.
In real estate, this circle of competence is buying a ready-to-move-in or nearing completion property. In the current scenario, when there will be numerous such options available it would make sense to buy certainty and avoid getting stuck in a trap of paying rent as well as EMI. Unless the new project has unique features or attractive pricing, it’s better to buy what you see. There are various data points that can help filter good apples from bad apples; if only one seeks there are opportunities galore amidst a lot of gloom and doom.