Real Estate Market

The real estate segment mainly consists of immovable assets in the form of building, lands etc. its peculiarity lies in the fact that although the nature of the asset in terms of its uses can be changed it is very difficult and at one point impossible to create new real estate asset. Hence the demand outstrips the inelastic supply resulting in prices skyrocketing.

As an investment in an asset real estate too has its market to facilitate transactions and dealings between buyers and sellers, typically in the lines of a share market or debt market. The only difference is the nature of dealings and the type of players present.

Real Estate, in fact, is an important investment vehicle for pension funds and life insurance companies. Currently a trend towards the development of negotiable forms of real estate property interest is clearly witnessed. Although real estate is gaining in importance it is yet to have an organized efficient market like capital markets. Mainly private deals occupy the major portion.

Real estate investments can be of various types, namely, Free and Clear equity referring to full ownership rights for indefinite period; Leveraged equity referring to the ownership rights as earlier but with some debt or pledge or lien activated in case of default of any kind; Mortgages are a form of debt which has the property as the collateral.

The investments in real estate can be made through various Aggregation Vehicles like the Real Estate Limited Partnerships (RELPs) which allows partners to invest while having limited liability. Then there Commingled funds which are pools of capital created by large institutional investors organized by an intermediary and sharing rewards in proportion to their investments. Real Estate Investment Trusts (REITs) are the third kind of investment vehicle which are close ended investment company investing in real estate and traded in stock markets. They aggregate investors’ funds and allow them to diversify in the real estate segment itself.

Apart from this, individuals can privately negotiate with a party and can finalize a deal in individual capacity.

In a portfolio context where the stress is on diversification, real estate offers a scope to move away from common investment options and dabble in a segment which has got immense potential upside all over the world. The valuation in real estate is just like any other securities depending on the intrinsic value approach.

The emergence of derivative instruments having real estate assets as its underlying points to the development of this type of investments. Specifically, the mortgage backed securities which are sold in the secondary market with the buyer getting the interest directly as a reward for holding it, known as ‘pass through’ have become quite popular in the developed countries. The Eurodollar market is prominent in this respect.

The trend points to a very promising future for the real estate markets which are slowly evolving and getting structured with active trading to be seen.

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