22 Jun 2017
Investing in property can be a stressful and time-consuming process. However, if you know what to look for it can be surprisingly easy and profitable. Over 8 years of investing at Blackstone (world’s largest real estate fund) I visited hundreds of properties throughout the country met the CEOs of all the top developers and invested $1 billion in creating what is now the largest commercial portfolio in India.
I learned from the mistakes of competitors and saw first hand which properties ended up making money and which ones did not. This experience helped crystallize my thought process in real estate investing.
Seeing is Believing:
During the 2006-08 boom, a lot of investors invested in early stage developments. This entailed forecasting various parameters like project timelines, expected rents, infrastructure initiatives, absorption trends, tenant location preferences and so on. However, most of these assumptions proved to be wrong as the markets changed for the worse.
Development timelines got extended, approvals were not received on time, rent growth was much slower than expected and construction costs increased. Almost all these funds provided sub-par returns with some even losing their capital. This made me realize that investing in what you see in front of you is always better than trying to forecast the future.
Better Information equals Better Decisions:
When you buy completed commercial properties you know what the rent is, who the tenant is, the quality of the building and all the municipal permissions like Occupancy Certificate, Fire NOC, AAI clearance etc. You are therefore going-in with much better information than investors in early stage projects. Better information almost always means better investing decisions and better returns.
18% IRR over 4 years is better than 30% IRR in a year
Being conservative is an important trait in real estate investment. You need to tell yourself that IRRs of 30% does not exist, especially over 4-5 years. This means the project is wildly successful. If this were the case the developer would not have sold the project in the first place. 30% IRR for 4 years means 186% gain over 4 years. There are very few investments that provide returns like these. Like Buffett says, “Why jump over 7-foot bars when you can step over one-foot ones?”