Master of Science in Real Estate Development Innovation (MIRED)

Faculty of Architecture and Planning, Thammasat University

Investing in real estate comes in various forms, depending on the investor's financial capacity, expertise, and experience. Real estate investments can yield high returns but also come with significant risks. Generally, real estate investments can be categorized into two main types: direct investment and indirect investment. Before investing, investors need to understand the type of investment, the expected returns, and the associated risks. Most importantly, they must have sufficient information to make informed decisions, as high risk does not always guarantee high returns. Investors can make mistakes, leading to lost opportunities and increased risks. If you are interested in investing in real estate, the MIRED program offers options for you to consider.

1. Direct Investment involves putting in money, time, and resources to develop projects or invest in tangible real estate. This includes:

1.1. Developer - Expecting profits from selling or renting out properties, this option offers the highest returns but also carries the highest risks, such as location risks or risks from a lack of funding, labor, or external factors like market risks. After development, there is uncertainty about whether the property will sell or achieve the expected occupancy rates. Additionally, developers must bear the burden of interest payments to banks and reduced income over time (Time value of money) if the project development takes longer.

1.2. Investor - This involves purchasing buildings for personal use or rental. If profits are realized within a reasonable timeframe, the investor may sell. The risks here include timing the purchase or sale of the property and the financial resources required for the acquisition.

1.3. Speculator - Real estate has low liquidity compared to other investments. Speculation can involve buying properties and holding them for a short period before selling. Risks include unforeseen events and timing issues, as economic conditions may affect the ability to sell. Currently, speculation in condominiums has decreased as speculators find short-term profit opportunities challenging, and buyers lack purchasing power.

In summary, direct investment in real estate involves wanting to own the property and seeking substantial, tangible returns. However, direct investment requires significant capital, which may not be suitable for all investors. Another type of investment in real estate is:

2. Indirect Investment - Investors act as "partners" in a real estate project or co-owners (distinct from co-owners of residential condominiums). Typically, investors must invest through securities brokers and become participants in the real estate capital market. This is because real estate projects often require substantial funding. Developers may consider borrowing from banks but often seek alternative funding methods, such as bonds or real estate funds, to reduce interest burdens, like issuing Property Funds (PF) or Real Estate Investment Trusts (REITs). Investors can explore indirect investment options such as:

2.1. Property Fund - Investors expect returns in the form of dividends from the fund, which uses raised capital to buy or lease properties like office buildings, factories, or hotels. The fund distributes dividends based on rental income. Property funds are divided into two types: freehold and leasehold. However, in a sluggish economy or low rental rates, funds may struggle to convert rental income into dividends, potentially failing to meet investor expectations.

2.2. Real Estate Investment Trust (REIT) - Similar to property funds but more flexible, REITs are not limited to investing in a single rental property and can operate internationally. They can also borrow from various funding sources. For more information on investing in REITs, you can follow seminars organized by the Thai Real Estate Association at http://thairealestate.org/ or visit www.TerraBkk.com for details on REIT training.

2.3. Real Estate Capital Market - Real estate projects require substantial funding. Sometimes, operators may borrow from banks but still lack sufficient investment or may issue various securities to reduce interest burdens, such as issuing debentures or purchasing shares of real estate development companies listed on the stock exchange.

Indirect investors in the real estate market seem to face less risk and can expect fixed returns over a specific period. However, they may encounter higher opportunity costs compared to direct investors due to lower returns. If you are conservative, indirect investment can be quite appealing.

So, if you are considering investing in real estate, what should you invest in? You need to answer the following questions:

1. How much capital do you have? It should be cash on hand, not borrowed funds for investment, as returns may be lower than the interest owed. The author follows the 30:70 principle, meaning if your available funds are less than 30% of the total investment amount in real estate (either direct or indirect), you should not consider investing. For example, for a house priced at 10 million baht, if you have less than 3 million baht in cash and need to borrow 7 million baht, can you afford the monthly payments on that loan (approximately 44,000 baht/month at an average interest rate of 4.00% over 20 years)?

2. How much risk can you tolerate? The KYC (Know Your Customer) tool or Risk Profile provided by financial institutions tests each investor's attitude toward risk and their ability to handle unexpected events.

3. Do you have reliable information to support your decision? Nowadays, finding investment information in real estate is not difficult, as investors can access data from various sources, including educational institutions offering courses on real estate and investment, such as the MIRED program, which covers topics related to investment, financial management, and risk management in real estate development. Information can also be found from various sources like TerraBkk.com or other research agencies.

4. Can you estimate the timing? Knowing when to invest or when to pause investments is crucial, as economic, social, and political conditions all affect the timing of investments. Timing in real estate refers to the right moment to invest, launch a project, or even withdraw from a project. Timing is essential for conducting feasibility studies for real estate projects, both in marketing and finance, as we study the future of the project using past data to forecast future outcomes. Real estate requires construction or development, which takes time, depending on the project type. Therefore, forecasting based on past data or even the most current updates can never be 100% accurate for the future. Researchers may need to account for risk factors or expected returns (Discount rate).

In conclusion, the MIRED program hopes this article provides guidance or insights for those interested in investing in real estate. Remember that real estate investment carries risks, and investors should study the information and understand real estate before investing.

Assistant Professor Dr. Sukulpat Koompaisarn

([email protected].)