Five tips to reduce real estate investment risks

Authored by Atul Goel, MD, Goel Ganga Group

Indian real estate is staging a spectacular comeback as demand is soaring in most of the major cities in India. Conducive market conditions, bullish economic sentiments, and lower interest rates are further dovetailing the market in a positive direction. 

An accelerated real estate market has also renewed investors’ interest. Alongside homebuyers, investors are also drawn to the market in large volumes in search of better returns.

However, it should be noted that just like the financial markets, real estate is not completely devoid of risk. There are numerous kinds of risks such as market, economic, and developer-related risks in the sector. To make safe investments and enjoy higher yields, it is essential for investors to have a prudent risk management strategy in place. 

Mentioned below are five significant tips that can help to manage and systematically reduce risk in real estate investments. 

Market analysis: It is important to analyse and scan the market before making any substantive investment. Investors should learn about the demand-supply, potential demand, future trends in the market, etc. to access the probable appreciation. Likewise, they should also learn more about the condition of the physical infrastructure, upcoming projects in the vicinity, business/IT parks, business catchments, social infrastructure, etc. A thorough market analysis can offer a lot of valuable insights to investors. 

Geographic diversification: If someone is investing in more than one property, it is advisable to invest across geography, rather than concentrating in one market. In a country like India, despite aggregate trends, regional disparities exist. Hence, investing in multiple geographies can mitigate risk and ensure a higher RoI. Before investing in multiple geographies, it is advisable to conduct proper research and get insights into the past track records of individual geographies. 

Asset diversification: Like geographic diversification, one should also invest in numerous assets to reduce market and economic risk. Putting the money across assets such as residential, commercial, retail, warehousing, etc. optimises the overall returns. It will spread risk across assets and the overall impact of any possible downtrend in a particular category will be limited. 

Developer credibility check: Over the past 5-7 years, developers’ credibility is becoming very essential. There are innumerable examples that have shown how projects from non-credible developers get stalled. Though big developers also fail, going with a credible name can reduce the risk to a great extent. Just like developers’ credibility, it is important to verify the functional dimension of the project, which includes utility, floor plan, design, specification, etc. A good quality project will attract more investors, buyers, and tenants, thereby rendering better returns. 

Evaluate your time horizon: Real estate is a tangible asset and requires a lot of patience. Unlike the stock market, one should have a medium to the long-term horizon at their disposal to reap the benefits of the investment. If one can hold the property for a long time, then the downside risk of cyclic pitfalls can be greatly averted, and one can divest at the right time. Hence, it is advisable to access the risk appetite and evaluate the time horizon.