Reality of realty gains
Call it influence peddling of the real estate stakeholders, or a thought-process that is culturally ingrained in the minds of the Indians, but the collective consciousness is made to believe that real estate investments are insulated against losses.
Real estate as an asset class has been oversold with the promise that you can never suffer loss with a physical asset, unlike stocks and mutual funds where an investor can suffer huge losses.
To top it all, there is a general belief that real estate offers the best Return on Investment (ROI).
A bullish real estate cycle every now and then is often cited as the empirical evidence.
But real estate in the long-term has hardly given better returns than any other investment products. This is even more true for the vast majority of apartment buyers, even if one discounts the depreciation factor.
But wait! If you don’t subscribe that it offers the best ROI, then you would be impressed to bet for safety. It is true that the market crash or wrong selection of stocks and mutual funds can erode wealth completely. And hence, generation wise possession of physical assets has been encouraged, including gold & real estate.
But the age-old wisdom was true in the good old age only; when property meant landed property, and gold didn’t have as much risk of being stolen.
The financial assets at that point of time were all about Bank Fixed Deposits (FDs) or National Saving Certificates (NSCs).
But it is imperative to note here that during those good old days, the FDs/NSCs were giving returns in the range of 13.5-14 per cent. In the early ‘90s, bank interest rates were in the range of 14 to 18 per cent. In late 80s, advertisements from nationalised banks saying money doubles in 5 years; 4.5 years were reasonably common.
It is only after 1998 that the interest rate of sub 10 per cent became an Indian reality.
So, even during those days, property was not offering the best ROI. Now coming to the risk profile, real estate being less volatile doesn’t mean less risky.
Correct calculation
So, with all these critical factors in play, real estate could also lead to losses, if one calculates the opportunity cost of money.
Abhishek Kapoor, Group CEO, Puravankara says while no asset class is entirely risk-free, real estate, especially in India, has shown resilience despite global uncertainties, consistently offering stable and attractive returns.
Beyond financial gains, real estate investments also provide social security benefits and tax savings, making it a unique blend of stability and security that appeals to investors.
However, to reap maximum benefits, one has to stay invested for the long term.
“When comparing real estate to other asset classes like equities or bonds, it’s essential to weigh the return on investment and risk tolerance. Unlike stocks or mutual funds, which are prone to high volatility and market fluctuations, real estate provides a physical asset with intrinsic value in the mid to long run. While the property market is not entirely immune to economic cycles, it tends to experience fewer extreme fluctuations than market-linked investments. This stability and the tangible nature of real estate make it an appealing option, particularly in uncertain economic times, offering a sense of security and consistency,” says Kapoor.
Vimal Nadar, Head of Research at Colliers India points out that since 2020, the annualised gross return of retail investment instruments has varied significantly.
Savings and post office accounts have offered the lowest returns, ranging from 2 to 6 per cent. In contrast, recurring and fixed deposits have yielded returns between 3 and 7 per cent, while corporate bonds provided relatively higher returns of 6 to 7 per cent.
“Government securities (G-Sec) and the Public Provident Fund (PPF) have offered returns in the range of 7% to 8%. Gold has demonstrated a more attractive performance, with returns ranging between 8% and 13%. Interestingly, Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs) and Fractional Ownership Platforms (FOPs) stand out with returns of 10% to 15%. From an institutional investor perspective, while residential assets typically yield lower returns in the range of 2-3%, retail and commercial real estate returns can go up to 10%,” says Nadar.
Real estate returns have to be calculated both in terms of inflation-adjusted as well as the borrowing cost-adjusted.
The advocates of real estate investment only talk about absolute returns, which appears to be mouth-watering.
So, a property that doubles its value in 10 years may appear to be an attractive investment, but has actually given a CAGR return of only 7.2 per cent.
Empirical evidence from the 2000 dot com bubble burst to 2008 Lehman crisis, suggests real estate could chain you for years if you wish to cut the losses. With real estate, only risk insulation is for the builders and the banks; not for the buyers.
The writer is CEO, Track2Realty
You can go wrong!
Had there been a zero per cent chance of loss, then everybody would have been investing in real estate only. And yet people still come out with expressions like “you can’t lose with property.” Ask someone having invested in the Lavasa project in India, and you would come to know how property investment could change the fortunes — for all the wrong reasons.
Here are a few realistic scenarios where real estate investment can also get into losses.
Risk #1: What if the builder defaulted. No! RERA is not a guarantee that the builder won’t default. We don’t have a legal framework where the preventive mechanism checks such defaults.
Risk #2: What if the project is delayed. Even if NCLT coming into the picture, if a project is delayed for a few years, your ROI is lower than inflation, and hence a loss-making proposition.
Risk #3: What if the project has inherent flaws that result in no appreciation or lesser appreciation than inflation. It could also lead to faster depreciation due to the project's poor quality. The myth of long holding also fails in such a case.
Risk # 4: There are also interest rate risks and interest rates can go up anytime during the course of long tenure of EMI settlement. In such a scenario, ROI is lesser than the amount paid.
Risk #5: What if a buyer is forced into distress exit; it is no different than any other financial asset. If with a financial product, the market could be in a down cycle, so is with real estate. Add to it, the developer’s exit penalty, and one suffers huge losses.
Risk #6: If the investment is for the purpose of rental returns, an unoccupied building with no tenant is a risk to consider. Add to it, issues with tenants (such as non-payment of rent, property damage, or vacancies) can reduce income and profitability.
Risk #7: If it is a landed property, then the title claims or illegal encroachment could also pose a threat to the investment.
Risk #8: Now with the removal of LTCG benefits, taxation is also a risk. Add to it, any future taxation risk could be a reality as well.
