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“Anybody
looking at real estate as an investment
option is currently at least in the
post 35 year age group,” says
chartered accountant Raghu Marwah. “In
the current scenario, other financial
instruments score over real estate as
a long-term investment option. The returns
in the short and long term are more
attractive.” |
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Portfolio advisor Sanjay Mittal too agrees. “Investment
in mutual funds and stock markets is liquid. But investments
in the property market are not. Mutual funds yield
at least 40% year-on-year returns. One of my investors
put in Rs 20,000 per month in the Reliance growth
fund and his returns are currently over Rs 3.6 crore
in 10 years.
This is way above that in real estate. In fact, he
gives a thumb rule based on the worst performing systematic
investment plan mutual fund over the last 10 years.
If you have invested for over seven years, returns
are normally the amount invested multiplied by the
number of years it was invested for
So why are people investing in real estate at all?
Where did all the hype come from? Explains Arun Vikram
Goel, CEO of Dewan Housing Finance Venture Capital,
“The hype around the real estate market comes
primarily from speculative extremely short-term investors.
They have bought at launch prices and sold as the
values of each subsequent release by the developer
was raised and encashed their investment in the short
term. These would have yielded very high gains. Nobody
who has invested for the long term has contributed
to the hype because chances are that they have not
exited the market and their computed returns are notional.
A long-term investor should not look at hyped gains.”
Explains another property investment adviser, “At
the height of the boom, I had advised various investors
to put money into multiple projects and to recycle
the investments for maximum returns. In fact, I managed
portfolios of investors who had up to Rs 1 crore to
invest by putting in the 10% that was required to
book a property and then to exit when the next instalment
was due. The gains were then reinvested in newer launches
and the money was constantly increasing.”
But the current scenario is different. Today after
almost 8-10 months of slow-down in transactions, developers
are completing projects rather than launching numerous
new ones. Even the rate of hike of value is steady
and therefore the short-term speculator is kept at
bay. Goel explains this phenomenon. “Immature
markets tend to behave erratically. Initially rental
markets are not stable and more users think of purchase
rather than rentals.
Once the supply comes in the rental markets pick up
and those who do not want to occupy, lease out property.
This hike in demand brings in the speculators and
short-term buyers. Finally when there is a glut and
capital values stop rising, the rentals will rise.
But typically yields from residential real estate
investments is only 5-6% in stable markets and 3-4%
in unstable markets.”
So again why invest in real estate at all ? Why not
only in mutual funds if you are a retail investor?
“To diversify your portfolio,” says Goel.
And he has a simple mantra for the retail investor
Do not make investments on the basis of hype. In a
market correction hype comes down and you get a realistic
picture. It is wise to hold a diversified portfolio
with real estate as one of the options Time your entry
correctly. The hype typically starts when the peak
is reached. If you enter at the peak, you will not
get the best rates and you may be part of the slide
During investing for the long-term remember that returns
average out. The property adviser who does not wish
to be named, maintains that normally even in weak
market cycles property values double in five years.
So if you are in the 35-plus age group, your property
value will at least double every five years and you
will never lose out. However, the rate of enhancement
of the mutual fund investments are greater in the
short term.
Sanjay Mathur of Pearls Infrastructure says long-term
returns on real estate investments can be up to 200-300%
if you choose your destination correctly. If you invest
in what is the periphery of the city today and hence
cheaper, and if there is good economic activity there,
the returns in the long term are definitely positive.
Goel agrees that the choice of investment destination
is important. “But real estate decisions are
often emotionally driven too. Aspirational considerations
may drive the investors to look at property purchase
than yield analysis alone. But if the investor reads
the future potential of markets correctly, he can
get good returns.
The retail investor has more to look forward too from
real estate markets. The SEBI has already issued draft
guidelines for Real Estate Investment Trusts (REITS),
a sound financial instrument in developed real estate
markets around the world. “This will open up
a class of investment to the real estate retail buyer
that was earlier not possible,” says Goel. He
sees younger investor opting more for systematic investments
in mutual funds that is more speculative but has greater
returns. The REITS, expected to be functional by next
year, will attract an older investor who takes less
risks, but opts for steady returns.
