Distressed real estate offers great opportunity for investors in metro cities

Distressed residential realty in metro cities like Delhi, Mumbai, Kolkata, Bangalore and Chennai offers an amazing opportunity to investors. They can now snap up property in major cities at considerably lower prices. Several big institutional investors may look to create greater value from residential realty assets which are distressed. Innovation Homes did a similar experiment in the United States and that worked out very well. This institutional real estate firm bought several properties which were distressed and then improved them majorly before renting them out as well. The business model deserves replication in the Indian market for those who are aware that it is a buyer’s market at present.

Investors will seek residential realty offerings that are totally built and meets some basic guidelines in terms of usage, location and other factors that make it worthy enough to be rented out. This will require some basic work in terms of information gathering and research. Thereafter, investors can acquire this property at a considerable discount to the replacement cost which is nothing but the construction cost of a residential property at the present market prices. Institutional investors are aided in buying properties at large discounts by two factors, namely the abundant supply of residential realty in the market at present and also the investor’s ability to buy out a big portfolio of residential properties, thereby helping him/her angle for a larger discount from the builder/developer. These transactions boost the sector since real estate developers access badly required capital and lower their inventory. Creditors also have their dues repaid at least partially if not in full. Investors can generate profits by buying at considerable discounts. The investors will then decide whether to invest in making any improvements to the property in question.

Rental returns may work out to approximately 2.5-3% of the price of the asset in the country and this is where an innovative approach is needed. Investors have to zero in on systems like convertible bonds to raise financing. These offer interest returns and the rights for taking part in upside in the underlying asset value once the price of the asset crosses a particular threshold. Low-interest convertible bonds can be used by investors to finance their purchases of residential real estate. Once these properties are snapped up, they can create a viable business in property management by renting their assets out. With growing migration of the workforce into metro cities and the increasing shift towards total urbanization, there will be high demand for rental accommodation. In the future, investors can look to sell off some units to residential buyers in order to start getting some returns and also to cash in on a reviving real estate sector.