Real Estate Is In a Real Bad State Today

Real Estate Scenario in India  –  An Overview

In India, the real estate sector constitutes about 6% of Indian GDP and is the second largest provider of employment next only to agriculture. The biggest growth driver or factor for real estate development is the urbanization with an estimated 10-12 million people migrating to cities annually. However, that does not mean that one should invest all their hard earned money on real estate which is in a bad shape and yet to recover in India.

A volley of difficulties that an investor would face when investing in real estate – A Summary

1. Role of brokers– In India, buyers or seller of real estate tend to trust the advice of the brokers at face value and subsequently realizing that they have been misinformed. The choice of consumer price and service is restricted due to informal anti-competitive practices the real estate brokers indulge in.
2. Quality of Construction – Due to differences in the quality of construction, there are variations in the value of the property located in the same locality even though purchased at the same cost. It is here that buyers/sellers should be aware of when purchasing or selling a property.
3. A plethora of Paper Work – The lengthy and complex paperwork in the form of registration deeds, stamp duties, land documents such as adangal or pahani makes the real estate dealings quite complex and cumbersome.
4. Lack of adequate funding sources – Limited funding from banks and other lending institutions in addition to innumerable documentation requirements to submitted to financial/debt markets pose a serious challenge to real estate buyers or investors.
5. The myth of past returns as a guide – Even though the land is an appreciating asset, the property built on it is depreciating. Using the past growth standards of Indian real estate as a guide to the future is risky and illogical.

Real estate investment in India is not as liquid as the other forms of investment. Other investment options like mutual funds/shares or stocks are considered more liquid and can be easily transferred.

Demonetization Impact – An Analysis and way forward

The impact of demonetization has been felt on not only equity and mutual funds market but also on real estate. Based on sales data released by Knight Frank, fourth quarter yearly sales of 2016 have declined by 4.4% primarily because of demonetization.

In addition, there has been a decline in real estate launches by more than 60% during the quarter with developers having deferred the plans for new real estate projects because of limited visibility of off take.

There may also be a significant reduction or slowdown during the second half-yearly period of 2017 and during the financial year in 2018 with real estate developers waiting for consumers to show their reaction to their financial planning aspects.

As observed by fisdom, buyers may indulge in wait and watch policy while purchasing their best asset class due to changes in the capital markets regarding lower interest rate, correction in property prices, provisions in RERA, and volatility in equity markets, etc.

Graph: 1 — The impact of demonetization: 2H’16 sales decline across regions across India.

Source: Knight Frank, JM Financial

Conclusion –

Investing in Real Estate versus Mutual Funds/Equity Markets – Which Is Better?

For nonprofessionals, it seems that real estate as an asset class is a tangible and less risky and they think that the returns are highest and unmatched by any other asset class. However, on detailed analysis as a professional, I conclude that one should not link their property or home to one’s investment strategy.

On comparing real estate investment with the mutual fund or equity on the basis of returns and risks – the latter stands out to be giving more returns even though somewhat risky.

Through an example, one can better understand the reality of investing in real estate is not so worthy when compared with equity markets/mutual funds.

For instance, let us assume that the current price of a posh sea facing apartment in Mumbai is worth around Rs.1,25000 per sq. foot and during 1970’s, the price in that location was Rs.600 per sq. foot. It means that the price has increased by 208 times in just 45 years. On a Compounded Annualized Growth Rate (CAGR), it comes to 12.6% per annum.

In case of equity scenario, if I had invested in the Sensex even for 10 years (January 1980) and held on to that investment it would have grown by more than 246 times in 35 years with a CAGR of about 17% per annum. This can be shown in tabular format as shown below-

Real Estate   Rs.		Sensex    Rs.
01.1970	600	01.Jan.1980	119
30.01.21	1,25,000	30.Jan.2015	29,183
Years	45	Years	35
CAGR (%)	12.60	CAGR (%)	17.00

Source: Funds India

If I add, dividend received (about 2%), from the index constituents in such case the CAGR may be over 19% and this is much higher than the returns generated by several of the premium real estate investments. Even from investing in real estate in a prime location in cities such as Mumbai, Bangalore I would make lesser returns in real estate investments when compared with equity investments.

To conclude, it can be said that investing all your wealth in real estate is a bad proposition since a wiser investor would invest in Stock Market/Mutual Funds for building his or her long-term wealth with equities. Real estate is not ideal for short-term gains and even in long-term, there is uncertainty about the rate of growth as it is influenced by multiple factors.

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