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Equity Vs Real Estate: Should you house your funds in equities for better returns?
Financial Express  |  November 29, 2019

Arun Thukral

To own a place that can be called home is a dream for many. However, the rise in property prices over the last decade has discouraged buyers from fulfilling this lifelong dream. The economic slowdown has further pushed the sector into further distress. Liquidity problems and stalled unfinished projects add to the pile of issues impacting this sector. To revive this sector and restore the confidence of potential buyers, the government unveiled a set of bold measures.


To kick start unfinished projects, which are bleeding losses for project developers, as well as home buyers, a Rs 25,000 crore fund, has been allotted as last-mile funding. Several buyers, who have invested in such project, are burdened with not only EMIs but also rent expenses as they have not yet got possession of the same While these measures may prove beneficial for both parties involved, they bring the focus back on the discussion if housing indeed is a profitable option for investment.


It is no secret that Indians are fond of physical assets with real estate taking the front stage. Years of conditioning and lack of knowledge about investment options are the primary reasons for the affinity of Indians to these physical assets. Investors have a misconception that investing in property is a route to wealth generation. But what they do not realize is that though real estate is an income-generating asset, any appreciation in capital value is unpredictable as it depends on its location.


Those who buy a property from the investment perspective fail to earn inflation-adjusted returns in the long-run due to the following factors:


Unorganized Market


The Indian real estate market is still in its infancy, largely unorganized and dominated by a large number of small players, with very few corporate or large players having a national presence. The real estate sector has faced two major challenges in the last few years &ndash economic slowdown and in sales. Heavy debt and slow sales have forced many players of the market dwindling the trust factor of potential customers.


Underperforming Asset


Real estate generally acts as a hedge against inflation since home values and rents typically increase during times of inflation. If income grows as it has in the past (generally less than inflation) and rising interest rates cap price appreciation or may even push prices down, then it is quite possible there will be little or no future appreciation in real estate assets. At many micro-markets, the rentals are far below the fixed deposit rates or 10-year GSec yields.


Unpredictable Asset


Real Estate is an income-generating asset, but the yield differs from location to location, unlike financial instruments. The demand drives the value appreciation in real estate, and since the demand differs from pocket to pocket, the appreciation and rentals vary in different cities and different locations in the same city/ town. It is difficult for a retail investor to have a diversified portfolio in real estate as it requires huge investments. Overall, the Real Estate market is largely opaque and unpredictable in nature.


Unfavorable Loan-to-value Ratio


RBI has laid down stricter norms and guidelines for banks dispensing housing loans. The loan-to-value (LTV) ratio &ndash the amount of loan that can be given for a property of a certain market value &ndash is now restricted to 70%, whereas it previously ranged between 80% and even 90% of the property value. This makes it difficult for buyers who don’t have that kind of money in hand.


Attachment to Property


People are compelled to stay invested in real estate that is past its prime despite evidence that clearly points out to the changed realities. Investors tend to link properties to memories and emotions. Most investors forget about return on investment and that is the prime reason for the underperformance of the asset. Despite the fact that yields on Real Estate investment have been less than the 10-year GSec yields for the last 10 years, investors have been clinging to Real Estate with an expectation of revival and extra-ordinary gains. Due to lack of knowledge and proper guidance, they fail to optimally allocate their investments into growth assets like equities.


No guarantee on liquidity


Investors assume that in real estate, one can buy and sell at any time. However, the fact is that transaction costs in real estate, like brokerage and stamp duty, and the difference in the buying and selling prices due to illiquidity creates an immediate negative return.


Burden of Interest on EMIs


Since many people buy real estate through the home loan route, the cost is further pushed northwards due to the burden of interest on EMIs.


Maintenance & Repairs


Speaking of additional cost, we cannot turn a blind eye to an outflow in the form of maintenance charges and repair costs. Real estate properties require maintenance, repairs, and upgrades which involve expenses.


High Risk Involved


Physical assets markets are illiquid these assets are relatively difficult to be monetized at the time of need. These asset classes are not regulated there are no market makers for these asset classes and hence, the counterparty risk always persists at the time of transaction.


A way to beat inflation is to park one’s money in investments that offer returns that are higher than the rate of inflation. Time and again, equities have given the highest inflation-adjusted rate of return over the long term. Unlike Real Estate, listed equity stocks can be easily bought or sold on the stock exchanges instantly and the proceeds are settled within a time period of 2 market working days, excluding the transaction date. The Indian equity market is regulated by the Securities & Exchange Board of India (SEBI) which is a vigilant and strict regulator of equity markets ensuring transparency.


When we invest in property because we love it, we short change our wealth.  Investors are advised to target equity as an investment focus, so as to grow their wealth over the long term and reap the benefits of a growing nation.


(The author is MD & CEO, Axis Securities)