Real Estate or Equity?
which gives a better return?
Obviously it has to be equity used to buy RE…correct?
well look at Hdfc..it captures the middle class dream does it not?
if India gets prosperous people will buy homes…bigger homes…bigger loans…so who benefits? Hdfc.
Who knows this? Hdfc
Many people in the top have a significant portfolio but no own house….LOL
Kashi
Real-estate values, in Bangalore, as stated in the link, do not seem to match what I see around me. I am not a real-estate broker. So, my figures may be statistically questionable. Nonetheless, the values of my properties have gone up by at least 2.5 times in this period and steadily (without panic falls and unexplainable rises of the stock market). I certainly do not see erosion in value anywhere in Bangalore except where the buildings are on questionable land (tank beds, agricultural wet lands etc).
Real-estate is, of course, very risky – in terms of the title itself (do you really really own it). And suffers from liquidity. But, one should be careful in using a cherry-picked stock (with hindsight) as a basis for comparison.
Pandu
B’Lore real estate.
One of my colleague, is selling a 1600 sq ft apt, right in White Fields IT Corridor for appx less than Rs.4000 per sq ft. And NOT able to find buyers.
Real Estate price rise is kind of myth. Sure, some benefit. However, that gets magnified BIG time & gets proportionately Higher mileage , than it probably should.
Vinod
Kashi,
2.5 times up from 2007 price in Bangalore? Interesting…2007-08 was the peak of last bull run..
What kind of builders ? Reputed builders like Sobha or not so credible builders ? Could you please tell what was the price in 2007 & current price, say for a 2 BHK or 3BHK ?
I have not bought property in Bangalore. But following the developments for almost 15 years. I used to check with my IT-friends very often. As per my understanding price action of Bangalore properties(2-3 BHK 800-1200Sq.ft) is as follows : (I am talking about the middle level segment what IT-people in Bangalore are buying).
Not so credible builders
————————
2001-2002 – Rs.12-15 L
2005-2006 – 25-35 Lakhs
2007-2008 – 40-50 Lakhs
2015 – 45-60 Lakhs
Credible builders (But not premium)
——————————
2001-2002 – Rs.25-30 L
2005-2006 – 35-50 Lakhs
2007-2008 – 50-80 Lakhs
2015 – 70-90 Lakhs
This is what I understand. I am wrong, perhaps..
moronbuffett
“fools build houses; wise men live in them” – old chinese proverb
“morons pay home loan emi; wise men buy shares of the lending bank” – new indian maxim
Kashi
Vinod –
2 properties – 3 BHK apt (2050 sft) in Mantri Greens (Malleswaram) – I bought at 85L (2007) – now, I see quotes of 2.5CR upwards and yes, I have seen recent sales as well – so no mythical quote this.
Since you may not be familiar with Bangalore – this is a very busy area – next to a Mall, Metro etc etc – good location for people who prefer a typical city life.
Another in Nagarbavi – a suburb – typical Bangalore independent house , good clean air, not much traffic etc but no malls. Bought in 2007 @1800 sft (land price) now it quotes upwards of 7000 sft.
Now, will I get this price when I actually try to sell? I don’t know. How long will I take to sell? I don’t know.
Don’t get me wrong – real estate is dicey and is accompanied with many risks.
But I take specific objection to a cherry-picked stock with hindsight wisdom. I have some absolute duds in my equity portfolio with no hope in hell of them ever getting back anywhere close to the price at which I bought.
Vinod
Kashi,
Thanks for the reply. Good that you got such a good appreciation. But are you sure that your case is not an exception ? Can it be generalised for atleast 50% of the properties in Bangalore ?
I lived in Bangalore for three years (2001-2004). When I ask my friends who bought flats for around 30L during 2004-2006, they tell that they can expect max 50L now, that too if they are able to find a buyer.
Indra
Why compare RE returns with Equity returns? Risks are completely different in these two. They serve completely different purpose.
REIT returns can be compared with the corresponding benchmark index but not with RE.
Vinod
Same is with residential plots.
I went to Bangalore in 2009 and visited some residential plots in Habbal & Banasawadi (near Outer Ring Road). Those were quoting around Rs.4000-5000 /sq.ft then. I didn’t buy. Those properties are quoting now around 6000/sq.ft now. I am told that these properties were quoting Rs.300-500/sq.ft during 2001-2002. People who bought at that time got 10X returns in 5-6 years.
Normal residential plots in Koramangala were quoting around 8000-10000/sq.ft during 2008-2009. I don’t know how much it costs now. But I don’t think that people got 4x-5x returns during 2009-2015. ( I am talking about residential plots, not commercial)
Sandeep
I completely agree that we shouldn’t be comparing the overall real estate market with one cherry-picked stock. That’s unfair. If we are picking just HDFC, we should then compare it with an apartment in Bandra ( Mumbai ) or a comparable area where real estate prices have appreciated by more then 3 or 4 times.
@Vinod -> I dont think that’s an exception. I bought a flat in Electronic City ( Bangalore ) in 2007 and it has doubled now. Am earning rental income as well so while its not as good as Kashi’s case, I am reasonably satisfied. Having said that, I don’t think we can generalize for 50% of all properties but then can we generalize the high equity returns for 50% of all active stocks in 2007.
Vinod
@Sandeep – Double in 8 years is < 10% p.a. + 2-3% rental yield.
If you are happy with these kind of returns from such illiquid and speculative assets like RE, then it is good.
The reason I wanted to generalize is not to make an argument. I am at overweight on equity and I want to diversify. So I am checking if I can include RE in my portfolio. Since I am an NRI I have regional limitations for RE investments. I can invest either in Kerala(native) or Bangalore where I have relatives/friends. I am trying to develop conviction to invest in Bangalore RE by seeking reply to the following question.
If I invest in Bangalore RE (doesn't matter plots/flats/villas..) what is the kind of return I can expect in long term (say 10 years)
1) 10% or less p.a – 3x in 10yrs
2) 15% – 4x in 10 yrs
3) 20% – 6x in 10 yrs
4) 25% – 10x in 10 yrs
5) 30% or more….
Prashanth
Real estate returns over the last 10-15 years in may cities have left Equity returns in the dust. The 200 rupees per sq. ft in 2000 to 6000 rupees per sq. ft today is not unusual..
I have wracked my brain to figure out why this is true. I think rapid urbanization and black money have contributed significantly to this.
10 years of UPA, helped real estate over equities. Equities may get their day in the sun some day. But it has not had it’s day over the last 15 years. Real estate has been by far the winner.
Raghavan
Prashanth,
The NAV of Reliance Growth was around 20.00 in Jan 2002 and it is 783.00 today. Is this not better than your RE returns?
Prashanth
Raghavan,
Yes, it is.
My point is that the sheer fact that the Stock market represents the hard work, ingenuity, persistence of millions of Indians means that it should beat RE hands down. That doesn’t seem to be the case. It has been a close call so far, or worse Real Estate has it’s nose ahead depending on where you pick the land and what time range you choose. In some cases it has beaten stock market by a large margin.
Sensex has returned 7-8 times in the last 10 years, there are plenty of real estate stories where it has returned much more. And, due to the leverage used in Real estate, the wealth creation effect is much more.
The wealth creation was achieved without having to put up with the volatility of stock markets or the breaking one’s head with frustrating govt. attitude and policies.
kalyan
RE and equity are both similar. If you are buying randomly without research more often than not you will lose or break even. If you do research and get lucky you may earn similar results like some hot property or HDFC bank stock.
But, how can one avoid leverage and achieve diversification in RE.
I can buy HDFC equity fund and hope to get the average returns of equity market. How can I get average returns of RE.
I can buy an equity MF with the Rs1000 I have without resorting to leverage. How can I do that with RE? How can one achieve diversification and non-leverage situation with RE.
And finally if I want money, I can get money in 2 days without getting into fire sale like situation.Good luck liquidating your RE for fair value (whatever it is) when in need in a matter of days.
subra
Prashanth: you are perfectly right, stick to RE.
Raghavan: stick to Reliance Growth.
It is personal finance. To each his own.
Srinivas
Prashant
I read an interesting post on this subject elsewhere. If you wish to go through, here is the link. There all incidental costs to be considered are factored in.
http://thecalminvestor.com/the-myth-of-real-estate-investing-india/
The last paragraph indicates few positives of RE investing.
If you see in totality, RE seems to giving returns more or less equal to equities. But the associated costs make it unsuitable to general investors.
If you take out capital gains tax and subsequent money management issues, the returns fall. On top of it there is a problem of illiquidity.
Thus the sentence RE is better than equity may not be applicable to all.
Prashanth
Subra, actually I have been equity heavy for more than 10 years now.
But that doesn’t stop me from wondering why Real estate has done amazingly well, given that is it more or less a commodity.
Also, a lot of the equity returns over the last year or two have been due to Modi. This also impacts the overall returns over 10 or 15 years. Please take out the Modi effect and then check equity returns.
Srinivas
Another problem with RE investments is comparison with notional costs. In a particular area in a city, brokers quote some rate and keep increasing rates over a period.
When my friend was trying to sell his house and gave an ad in paper about 50 persons contacted him quoting anywhere +/- 30% of his expectation with a commission of 2-5%. Finally no one could sell it and he sold at a discount to his expectations after 3 years.
The real estate boom caused many to take up consultancy and the seemingly easy money is the lure. There is no qualification required and experience is non existent.
May be true that some might have got good returns. But what are the costs. A 50L apartment may fetch max 20000 PM rent compared to about 400000 FD interest. And the notional value is for satisfaction only and not easily realizable.
One needs to be cautious with rE asset class.
Vinod
@Sandeep -> You are absolutely correct that Rs.200/sq.ft in 2000 is 6000/sq.ft now (30x in 15 years). But Rs.200 in 2000 was grown to 4000-5000 in 2007-2008 itself, the peak of last boom. 2000-2008 was the golden era of RE. No doubt people invested in RE in 2000 would have got very very good returns anywhere in India.
Going forward, can you expect the same return in next 15 years ? rs.6000/sq.ft now to rs.180000/sq.ft in 15 years…?