Real estate is the oldest asset class known to mankind. Be it the charm of caves in the Stone Ages or a patch of land to grow crops on in the Neolithic Age. As Indians, we all are still passionate about holding dear to us a patch of land that we can call our own. Don’t believe me? Check out the emotional chords being pulled by this ad which shows how an own house can make a strange city also feel your own or this one where an old father wants to ensure he has an own house for his daughter’s
I truly understand the need to own a house. When we are putting in such a lot of effort to earn the money that we do, then it is only fair to also spend that money on something that can bring us peace of mind. If owning a house is something that you have always dreamed of, no own vs rent debate can probably satisfy your yearning.
However, when it comes to investing, I think real estate is on far more rocky terrain. We invest when we want the underlying value of an asset to appreciate over time. Also, when we invest, we choose asset classes taking in a number of factors under consideration. While real estate remains a favored investment vehicle for most Indians, the more I look at it, the more I believe it is only a means of diversification if one has way too much capital. Else, there are many other better asset classes to consider.
Being a person of reason and bullet points, let me enumerate why I believe real estate is not the investment that its’ made out to be:
Before you charge at me saying other asset classes are as risky, let me clarify. With real estate, cherry picking the right property is extremely important. There too, you can only guess that the value of the area may go up due to an upcoming airport or better accessibility in the future. However, the returns on any real estate that you choose to invest depends highly on the specific property that you pick. While that is the case with stocks too, the low entry barrier makes it easier to hold a diversified portfolio. And with mutual funds, it’s easier to get a piece of professionally managed and diversified portfolio.
High entry ticket
With mutual funds, while you can start investing with as little as Rs. 5000 in one go or even Rs. 500 a month, to get a decent property in an urban area the figure starts from a few Lakhs. The risk only increases as the amount invested goes up. Which also means that investing in a luxury property is much more risky as your investment value riding on a single property will be pretty high. More importantly, a lot of investors end up having to incur loans from the bank at a high cost in order to fund such property purchases. This high cost makes it that much more difficult to get good returns on the investment.
A lot of times one of the stats I often heard from someone raving about property was how it doubled in value in merely 5 years! Well, that means the annual rate of return for that investment was approximately 14% which has been exceeded by enough equity assets with a much lower risk. Also, the rental yield at least in cities like Mumbai is not more than 5% annually. Add the cost of a loan to this working and for all you know, in the short term, the returns could very well be negative on your investment. Mint does a good job of explaining why the slump this time might be ominous.
The idea of liquidity simply implies that when you invest money in an asset, if need be, it should be easily available as cash. In other words, you should be able to transfer ownership of that asset in return of underlying value. Real Estate is probably the most illiquid asset in the market today. If the industry is facing a slump, then the liquidity is bound to go down further with enough investors having to wait years to get a buyer willing to pay a “fair value” for the property. Even with a booming market, in normal course of things as well, there is a long gestation period for any property to be sold or liquidated. If you are in urgent need of money, it is safer to not assume the value of any property invested in as a possible avenue of funds.
Unorganised and unregulated
While the government is now making efforts to put in some structures in place, especially with the RERA regulation for under construction properties, the market still remains unorganised. Unlike bonds or stocks, which have a singular regulated market place with a uniform and transparent pricing mechanism, that is not the case with real estate. There is no market regulator and neither is there any transparency. There is no possible credibility check on builders either. Even big well advertised builders like Amrapali could divert funds elsewhere and delay projects or use low quality materials and cut you short.
For most other asset classes, you can easily invest online and track at regular intervals. With Real estate, not only are there a lot of processes when it comes to registration or purchase, being a landlord is not hassle free either. With tenants comes more responsibility like finding them, getting rent on time or handling their complaints and requirements. With all the hassle and lower returns, the equation seems woefully imbalanced.
Diversification is difficult
For most investors, buying one house is difficult. For any asset class, diversification is a key factor in reducing risks. With real estate, diversification is difficult for a few reasons. When you end up buying multiple properties, you would be concentrating a lot of your assets in the real estate basket. More importantly, geographical diversification is extremely difficult. Managing properties which are not easily accessible is far more difficult than it seems.
While for a lot of people real estate investing is more like a mindset and having a property in the family over generations a feel-good factor, consider these practical reasons as to why Real Estate is not as attractive an investment option as we like to believe.
Do you invest in real estate? What do you think about it?