Global Investment Risk in Real Estate –An Investment Option

According to a study by property consultancy CBRE, real estate reported a 27 percent increase in investment in 2019, with an estimated fund inflow of USD 6 billion across all main categories. Investment activities were dominated by the office and construction sectors, each with approximately 40 percent of the fund inflow. This was followed by an investment in hotels of 11%.It will continue to draw investment from both global and domestic players as the industry becomes more structured, open and profitable. Because of the additional need for buildings, auxiliary units, new airports, metro, train stations, real estate assets would deliver long-term benefits for investors in developing countries. Regardless of the fact that global investment in real estate is vulnerable to several economic risk factors, it plays a special role in an investor's portfolio. According to a study published in 2018 by 360 Realtors, "NRI investments in Indian real estate have doubled from $5 billion in 2014 to $10.2 billion in 2018." The Bloomberg analysts conclude that on average, the stock portfolio will produce 22 percent returns. Stock portfolio offers foreign investment avenue diversification. In addition, loss of one protection can be compensated from profitable stock, thus providing nullifying impact. According to Nifty Realty index, ROE is estimated at 6.8 percent for 2019-2020 and PE is Rs.23 [ACE index estimates for 2019-20]

In India, to meet the rising demand for housing initiated by rapid urbanization, the Prime Minister declared 'April 2019-March 2020' as the Construction Technology Year. The Union Cabinet, chaired by the PM, gave the PMAY (Pradhan Mantri Awas Yojana) approval for 'Housing for All by 2022' and schemes consist of acts such as rehabilitation of slum dwellers' slums (central grant of Rs. One lakh per household), promotion of affordable houses for weaker sections of society through loan-related subsidies or in collaboration with private and public sectors Despite the fact that uncertainties such as economic, political and financial risk, globalization of markets continues. This has resulted in increase in investments in cross border real estate market. Real estate investment acts as a collateral security and facilitates easy access to credit [4]. More than half of the total retail loan portfolio of the banks comprises housing loan, as per ―Trends and Progress of Banking Report 2016-17‖ [5]. The juncture of the real estate market encompass self-consumption (or provision), sale to users (market), letting for long

MARKET SIZE ESTIMATE CHANGE

The size of the worldwide real estate investment market, professionally managed, increased by 7.8 percent from $8.9 trillion in 2018 to $9.6 trillion in 2019. When the market grew by 4.1 percent, growth was higher compared to 2018. Invested real estate stock, as distinct from owner-occupied and non-investment leased real estate, is characterized as property owned for the primary purpose of benefiting from investment returns. The owner-occupied portion of the market includes real estate owned and occupied by both private and public corporations, real estate owned and used for government purposes by states, and residential buildings owned by private homeowners. In addition, there are companies that own and lease land to tenants, but their primary purpose is to produce a return on investment. These involve social housing associations and municipalities with substations in some countries and have substantial real estate portfolios.

I. Residential real estate consists of new construction and re-sale homes. Townhouses, high value homes, duplexes, triple decker, multigenerational and vacation homes are the common categories. II. Commercial real estate includes medical and educational buildings, hotels, shopping centers (malls), offices and apartments. As apartments are owned to produce income (used for residential purpose) they are categorized as commercial real estate. III. Industrial real estate includes manufacturing units (buildings and property) and warehouses. These buildings can be used to fulfill various purposes like production, storage, distribution and for research and development purpose. IV. Land includes ranches, working farms and vacant land (site assembly).

Risk is the variability in outcome. For that reason returns of real estate investments are unpredictable. Individuals who are experts/analysts conduct economy wide analysis to reduce element of risk associated with real estate investments and to frame strategies accordingly.

In Q2 2019, Euler Hermes conducted economic research on medium-term rating (country grade) and short-term rating (country risk level) as a source of economic analysis that would assist in global real estate investments[8]. A country with a higher level of risk would minimize investment in real estate. These guide investors in their investments to be more careful. North Korea, Sri Lanka and Syria's average returns were negative, while US and Australian securities outperformed[8]. Due to its strength and weaknesses, India's graded ranking is B2 (Q2 2019) at a crossroads. On the flawed side, the distribution of patchy wealth, omnipresent poverty, insufficient infrastructure, new infrastructure,current and fiscal account deficits, weak structural business environment and lack of beforehand policies and measures [9]. Red Colour: High Risk countries: Argentina, Zambia, Libya, Venezuela, Sudan, Yemen, Niger, Democratic Republic of Congo, Ukraine, Iran, Iraq, Syria, Pakistan, Nepal, Mongolia, Solomon Island, Cuba, Bolivia, etc. Uruguay, Morocco, Oman, Saudi Arabia, India, Egypt, Kenya, Italy, China, Hong Kong, Singapore, United Kingdom, Romania, Cyprus, Malaysia, etc. Green Colour: Low Risk countries: Australia, New Zealand, Indonesia, UAE, Taiwan, Thailand, Japan, South Korea, Finland, Norway, Germany, Spain, Portugal, Ireland, France, Poland, Switzerland, Kuwait, Israel, US, Canada, Colombia, Chile, Peru Source: Euler Hermes, as of Jan 25, 2019 (Q2- Country risk map) [8]

It is interrelated to the maturity of the market, transparency and liquidity of real estate assets [4]. The real estate market dynamics have been affected by the creation of European Monetary Union, the unique currency area. The financing system of the countries also varies. As in European countries and Japan, bank based financing system prevails while countries like Australia, US and Canada are known for capital-market oriented financing system [Centre for European Economic Research]. India is primarily a cash-transaction oriented economy [7]. It is associated with variability and explosive nature of returns and investor‘s ability to probe price correctly. The maturity of the market, transparency and liquidity of real estate assets[4] are interrelated. The dynamics of the real estate market have been influenced by the development of a unique currency zone, the European Monetary Union. The method of funding for countries often differs. Bank-based financing structures dominate, as in European countries and Japan, while countries such as Australia, the United States and Canada are renowned for the [Centre for European Economic Research] capital market-oriented financing mechanism. India is predominantly an economy geared towards cash-transaction[7].

This risk adversely affects investment proceeds as they excel during the recession (recovery phase) or as they are unable to reap any returns compared to dictated by the demand and supply powers of the property market[4]. The space market for real estate is heavily segmented by location and form of land. Demonetization has resulted in minimum GDP growth, wage earners are losing employment, thereby reducing their consumption to meet basic needs (or sustainable goods), as the Indian economy has been affected by them. [5].

Property values should be matched with fundamentals, otherwise the consequences [US subprime market crisis (2007-2008)] would be escorted. Investors pay less attention to international diversification due to the enormous disparities between international real estate portfolios. Investors are unfamiliar with taxes, fines, exotic regulatory barriers, foreign market systems and exchange rate risks. Real estate stocks provide a weak hedge against consumer price inflation in nearly every region. [7] The In India, citizens' income levels are poor compared to real-estate property values, an unattractive investment[5]. It is an illiquid investment of sorts. Investors aren't financially literate so undertake traditional mode of investments. Other reasons can be protectionist measures being adopted by host country to protect domestic investors (nepotism), construction delays, default by contractors, repatriation of profits, kidnapping, ransom, terrorism and corruption, antiglobalisation movement and caps on FDI. [7]

As a result of urbanization, real estate assets would yield long-term benefits for investors in developed countries due to the additional need for buildings, ancillary units, etc. None of the business segments are risk free. In each and every investment avenue, it is inherited, rendering its returns unpredictable. It is important to define and quantify the factors contributing to this volatility in order to capture various levels of market risk. Reports from ACE Equity and Bloomberg, J.P. Morgan and Deutsche Bank show that the strongest investment field is the global real estate sector. It is recommended that fundamental research be performed to reduce the risk associated with investments in real estate. Regardless of the reality that global real estate investments are prone to several economy wide risk factors, constitute a special place in the portfolio of an investor, to reap advantage of compensating effect (diversification).

[1] https://www.livemint.com/money/personal-finance/nri-investors-in-indian-property-

[2] https://m.economictimes.com/wealth/invest/ real-estate-market-set-for-a-comeback-5-promising-stocks-from-the-sector/amp_articleshow/70000796.cms [3] https://www.pmindia.gov.in/en/news_updates /housing-for-all-by-2022-mission-national-mission-for-urban-housing/ [4] Jun Chen and Peter Hobbs.(2003). Global Real Estate Risk Index. The Journal of Portfolio Management. 66-75. [5] Ms. Jaya G. Prabhu Parrikar. (2018). Affordability in Housing Markets in India: An Overview. International Journal of Multidisciplinary.Vol-03(03). 99-101. [6] Thierry Theurillat, Patrick Rérat and Olivier Crevoisier. (2014). The real estate markets: Players, institutions and territories. Urban Studies. Vol.52(8). 1414-1433. [7] Aswathappa, K. International Business.6e. Chennai: Mc Graw Hill (Inda) Private Limited [8] https://www.eulerhermes.com/en_global/ economic-research/country-reports.html [9] https://www.eulerhermes.com/en_global/ economic-research/country-reports/India.html [10] economictimes.indiatimes.com/industry/ services/property-/-cstruction/real-estate-witness-27-increase-in-investment-in-2019-report/articleshow/75423570.cms?from=mdr#:~:text=Real%20estate%20recorded%20a%2027,around%2040%25%20inflow%20of%20funds.

Assistant Professor, Head of Department (Commerce), Akal University, Talwandi Sabo, Bathinda, Punjab (India)