Risk and Reward relation for all asset class is common & probably always holds true: Risk and Rewards are always directly related. It is believed that higher the risk, larger are the rewards associated and vice- versa.
Risk and Return in various stages of Real Estate project development
Project development involves various types of risks, and with every risk eliminated, the capital value appreciates. One needs to conduct a thorough introspection and position oneself accordingly.
Aggressive Speculator:
Returns Potential:
These investors prefer entering at the pre launch/soft launch stage, as this provides the highest return due to the low entry cost. However, in consideration, the investor faces approval risk. If a project is not approved the entire investment strategy could go off the pedestal.
Risk:
There is ideally no way to completely hedge (Making an investment to reduce the risk of adverse price movements in an asset) this risk but it can be mitigated to a reasonable level by going with A Grade developer with good track record.
A long-term Investor
Returns Potential:
Might think of entering at the launch stage and leave the initial gains but earn desired returns over a longer term. At this stage, the initial approval risk is mitigated, and marketing of the project begins & as there has also been some initial investment by other investors or FDI, this adds positive sentiments towards the prospect of the project.
Risk:
The risk at this stage is that construction might be delayed, or the capital value might suffer if the developer fails to achieve the desired absorption of units in the market.
Risk Averse Investor
Returns Potential:
Generally a first time buyer/immediate end user: For such buyers the construction progress is important; hence they prefer to enter during the later phases of construction.
Here the rise in prices during the course construction validates the buyer’s belief that it is a prudent buy. Due to rise in price, there is opportunity loss involved but it is not to be seen as bad thing.
Investors looking at Re-investing Real Estate gains also generally invest in this stage
Risk:
Rate of price growth and exit options in secondary market
A Budget-Conscious, Long Term Investor:
These are willing to take reasonable risk & may enter at the initial phase of construction; however, risk-averse buyers would prefer to enter near or after completion of a phase, where, except for receiving the final approvals, all other risks are taken care of.
