Investing In Property For Great Returns? Think Again!

Real estate forms a noticeable chunk in one’s personal wealth. According to the Karvy India Wealth Report FY 2013, the total individual wealth in India stood at Rs 201.90 lakh crore of which real estate comprised 16%. However, real estate, which is reputed to provide stellar returns (versus other asset classes) and is considered safe, is actually fraught with risk and characterized by: large ticket size, small or piecemeal investments are not possible; legal hassles involved in transfer, succession, etc. and high maintenance costs

Liquidity is, however, the biggest casualty in real estate investing. House sales are usually not easy and take much longer because of transaction costs and sheer ticket size. Typically, an immediate or even a medium-term need for funds is hard to fund by liquidating a real estate asset. Under such circumstances, one often ends up with a distress sale if the need for funds is very dire.

The debt-funded and tax-friendly environment for real estate investing is an easy draw for gullible investors.

While selling property may take weeks, months or sometimes years, financial assets (listed equity, listed bonds, fixed deposits, mutual funds and even gold) can usually be liquidated in a matter of minutes or at the worst, days.

Despite the reasons mentioned above, investors rush in hordes to make such investments. The biggest factor is the prospects of extraordinary returns versus other asset classes.

Usually backed by the anecdote of a friend or relative having made a killing on a real estate deal, the debt funded and tax-friendly environment for real estate investing is an easy draw for gullible investors. Middlemen (such as real estate brokers) who stand to gain on such transactions further fuel this by propagating the returns and the safety of such investments.

So does real estate indeed provide super-normal returns or is this a myth? Not really, if data analysed over the past seven years is anything to go by.

When looked at the NHB Residex to compute returns on real estate across various cities in India and bench-marked them against equity returns for the same period (see the table below). Interestingly, the BSE Sensex returned 14% for the same period. Barring one instance, where real estate in Chennai returned 18.71%, equities have surpassed real estate returns in most cities for the period considered. Considering real estate gave negative returns for some cities in this period clearly breaks the safety myth about this investment.