At a recently attended social function, Theza, a friend of mine, remarked, “No other investment gives you a return as much as investing in property does. For instance, take the example of my duplex bungalow, which I had purchased in 1994 at just Rs. 14 lakhs. People are now ready to pay two crores for the same.”
Such kinds of remarks and numbers can easily capture our attention, and rightfully so.
But the very next moment, Theza asked point blank, “What is your take on investment in stock market vis-a-vie investing in land?”
A couple of years’ back, this question would have been an irrelevant one. Equity vs. property........Interesting!!! Conventional norms are being challenged, so I thought.
When I calculated Theza’s return of investment in his property, I realised that the appreciation of his value in last twenty years has been 14.22 percent per annum.
Usually what happens in case of investing in properties is that we perform a lump sum calculation of our investments over a period of ten to twenty years or sometimes even longer than that. And most of the time, it becomes difficult for us to compare our returns in properties to other instruments available in the market.
Next day, I made a call to a friend who works in revenue department in Govt. Of Assam to find out about prices of land in Guwahati. After some rough calculations, I found that in some prime locations of the city like G.S. Road, etc., the rate of return is almost 24 percent per annum (as per calculations over the last decade). Please note this phenomenon is happening only in places like Guwahati or Dimapur-Chumukedima, and not in places like Dibrugarh, Phek or Wokha. The price escalation in Guwahati or Dimapur is mostly due to socio-political reasons. Now when I calculated the return of investments regarding an apartment, much to my surprise, I found the rate of return was below the current fix deposit rates. (Please note that the income from rent is not included in this calculation.)
Historically, Sensex has given a return of 18 percent. Now, it’s entirely the investor’s choice. If he/she understands the market and the risk associated with it, my answer is yes, one can invest in real estate. But so to say, there are more than a dozen of mutual funds who have produced above 25 percent annual average return in the last ten years.
Point to ponder:
• Most of us believe that the real estate is the best asset class. However, the return a developer or a builder can reap from realty is significantly higher than what an investor can.
• Besides transaction and maintenance cost, real estate suffers from a lack of real income, unless sold.
• Encroachment and title clarity compounds matter further for an ordinary investor.
• The house you live in cannot be termed as an investment-because you need a house to reside in. But any second or other property can be considered as an investment because it can be sold in the future for profit.
• Most real estate will give you a negative return if you try to sell immediately after buying. The transaction cost in real estate - from brokerage to stamp duty, etc., creates an immediate negative return. When people hold it for a long period of time, it gives them good a good return. If the same principal is applied to equities, surely, these will give them great returns like real estate.
• One crucial difference is that while real estate requires an outflow in the form of maintenance charges and repairs cost, equity creates an inflow in terms of dividend. Obviously, if you rent out your property, it can create inflow, but then it will lead to another problem - of getting the right tenant.
• Real estate, like any other asset class, is cyclical. The return varies over different time periods. Transaction cost, maintenance charges, illiquidity and non-transparency in the sector makes life difficult for an ordinary investor. But one cannot deny that real estate, like equity, has done well for the long-term investor.
At the end of the day, asset allocation is the best way to grow wealth over a period of time. The most important aspect of investing is not to put all your eggs in one basket. And play the game which you understand. After all, most of us enjoy cricket not baseball, don’t we?
The writer is the Principal Financial Planner at EconPenny. You can chat-twit-mail him at facebook@dipankar.jakharia | twitter@d_jakharia | dipankar.jakharia@gmail.com
