India's stock market has been doing well for the past decade, making it fashionable to write off other assets. Real estate investing is a popular punching bag. I see wealthy people claiming to have zero investment in real estate and are “all in” on stocks. Since rental yields for apartments in urban areas are only 2-3%, some people say fixed deposits are better than real estate.
However, if you are interested in real estate investing, do not avoid the asset based on such claims. A look at the lifestyles of India's richest industrialists, startup founders, and wealth managers reveals that they all own properties, large tracts of land, and farms in prime locations. Real estate can be a great investment if you buy it at the right time and for the right reasons.
Timing the cycle
When people say that the Nifty50 has achieved a CAGR of 12 per cent in the last 10 years, while some apartment in Gurgaon or Mumbai has achieved a CAGR of only 6 per cent, this comparison is subject to recency bias. is colored by. The real estate market, like the stock market, fluctuates cyclically. Real estate returns today look normal as the Indian real estate market experienced a major downturn from his 2014 to his 2020 and is recovering from it.
New home sales in the top seven cities peaked at 340,000 units in 2014, but began to slow down from 2015, according to data from real estate consultant Anarock. Due to demonetization and introduction of new RERA, the number decreased to 200,000 units in 2017. -breaker. Due to a lack of buyers, builders cut back on new sales, dropping from about 400,000 units in 2015 to fewer than 1.5 million units in 2017. However, due to sluggish sales, unsold inventory had ballooned to more than 7.5 million units by the end of 2016. In 2020, construction activities were completely suspended due to the coronavirus, prompting rationalization of supply. Sales rebounded to 365,000 units by 2022, and the unsold home inventory fell to 630,000 units, equivalent to about 20 months of sales compared to 47 months in 2017. This paved the way for real estate prices to recover.
House prices in India's top 50 cities have increased at a moderate CAGR of -0.2% to 8.5% over the past 10 years till June 2023, according to data collected by National Housing Bank from mortgage lenders. Delhi was the worst performing market, while Hyderabad came in second place. the best. If economic growth continues to support income levels, home prices could continue to rise from their recent lows. This means that real estate purchases, like stock purchases, should be made at market lows. By timing your purchase at the lowest point in the cycle (such as June 2020), you can benefit from both rising prices and increased rental income.
Comparison of land and apartment
Real estate moguls ask you to consider three factors when purchasing real estate: location, location, location. Unlike the stock market, which has some uniformity in trends, real estate prices vary widely based on the supply and demand dynamics of the micro-market and region in which you invest.
If you are considering investing in real estate primarily for price appreciation, land makes more sense than an apartment. Although you can earn rental income from an apartment, it becomes a depreciable asset after about 20 years. But if you're lucky in a suburban location with better infrastructure and connectivity, it can offer returns comparable to stocks. For example, the land owned by one of my relatives on the outskirts of Secunderabad has increased 100 times over the past 30 years, at a CAGR of 17 per cent. Location is the make-or-break factor that determines whether your property will give you returns comparable to stocks or savings banks. Regular monitoring is required to prevent land invasion, so purchase should be made in an easily accessible location.
anti-inflation
Apartments are not suitable sources of capital appreciation. But their rental income can be a useful inflation hedge. Rent can be a reliable source of income for people nearing retirement or looking for extra income. In good neighborhoods, rents will rise with inflation, even if the starting yield on a new apartment is 2-3%. Many city rental agreements include a 5-8% annual increase clause. The security deposit provides a periodic lump sum for maintenance. The rental yield of apartments is not comparable to FD. This is because rent is not a fixed rate of interest, but income that increases over the years.
safe harbor
Stock and bond markets sometimes rise and sometimes fall in unison. This risk is particularly heightened now that the global low interest rate regime is coming to an end. If your entire net worth is invested solely in financial assets, real estate is a great diversifier. This is a physical asset that behaves very differently than a financial asset.
Indeed, when an economic downturn occurs, buyers may also move away from real estate. When a crisis occurs, stock and bond prices plummet as investors quickly liquidate, but when a crisis occurs, transactions in the real estate market typically dry up. This is because real estate is usually owned by people who have no intention of selling it to raise emergency cash. Owning an apartment or vacation home outside the city can also serve as a safe harbor when life is disrupted by a black swan event. During the coronavirus pandemic, people living in their own homes were less likely to suffer a pink slip than those living in rented properties.
Investing is ultimately meant to give you joy. Living in your own property is a source of great satisfaction. This is exactly why wealthy people buy fancy apartments or farmhouses after building up wealth through business or investment.
how do you do it
This suggests three ways retail investors can approach real estate investing.
# If you are young and looking for capital gains, buy affordable land without leverage in an area you can monitor. This can be an illiquid asset, so avoid allocating more than 10 percent of your net worth to it.
# Put off buying an apartment until you know where you'll live and work for the rest of your life. The rental income of an apartment is usually much lower than the EMI incurred at the time of purchase. Therefore, it is not a good leveraged investment, especially if you do not intend to live there.
# If you're in your 40s or 50s and know where you want to settle down, buy a house or apartment in that area and move there. Minimize leverage and utilize your savings as much as possible. Deal with EMIs after retirement.
· Self-occupied apartment
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