Critics argue that real estate is more challenging to sell than stocks or bonds, but is that necessarily bad? It encourages long-term investment, potentially leading to higher returns over time.
Real estate holds a special place in Indian families’ stories, with tales of ancestral lands passed down through generations. We often hear about how if only those lands had been kept, we would not have to work today. People compare what their parents paid for houses or land years ago to today’s sky-high prices, imagining the wealth they could have had.
But does real estate beat stock market investments? Financial experts often promote stocks and mutual funds, claiming they offer better growth and easier access to money.
Yet, for many retirees, real estate is a reliable income source. They trust in steady rental returns, believing rents always keep up with inflation, ensuring a comfortable retirement.
Real estate investment catches up with inflation so need not track complex financial variables and assumptions.
Critics argue that real estate is more challenging to sell than stocks or bonds, but is that necessarily bad? It encourages long-term investment, potentially leading to higher returns over time. Any investment for that matter yields returns only if you stay invested for the long term. Even equity investors who invest for the long term, make money – hardly anybody earns in short-term trades. Liquidity has significantly improved in RE over the years. Not-so-super liquidity is a boon for the RE sector, which ends up holding you from impulse decisions to liquidate.
The thumb rule of real estate returns, “RE grows by 10 times in 10 years in India” suggests that even if it does not grow in 9 years, it could grow 10 times in the 10th year. When we talk of such returns, they are for lands, plots, houses, and industrial plots (can be referred to as investment RE category)– be it urban or rural – be it north, west, or south India.. Check for instances around you in the past decades.
Even developers offer insights into this discourse. They boast of reaping fourfold returns during the development cycle, from land acquisition to construction completion. Such are the lucrative margins in organized development if executed as planned. That is why, they can afford leverage at interest rates of 18% to 24%.
When such flats are sold for consumption at ‘market creating rates’ (market creating rates means that developers launch at premium rates and define the market price / create that market in that area with their marketing machinery), there’s not much capital appreciation scope left for the next 5 years for end-buyers. Financial consultants frequently refer to such acquisition rates as investment and compare modest rental yields, typically hovering around 2%. This figure might seem underwhelming when compared with returns from fixed deposits or other investment avenues.
However, this comparison fails to acknowledge the disparity between “consumption RE” and “investment RE” – akin to comparing apples to oranges.
Yet, if buyers perceive properties as consumption rather than investments, expecting returns solely from land appreciation, this cycle might not yield the anticipated benefits.
Despite the ongoing discussions and debates, real estate remains a favored investment option in India. Its consistent growth, supported by factors such as rapid urbanization, governmental backing, and tax advantages, continues to draw investors. Additionally, the recent introduction of Real Estate Investment Trusts (REITs) has democratized real estate investment, making it more accessible and liquid to individual retail investors. This addition provides another avenue for potential returns, further bolstering the attractiveness of real estate as an investment vehicle.
At Hecta, our customers often request investment category RE such as plots, lands, industrial plots, etc. “jad se makaan” (meaning land with building) is the most common request of end-buyers on our helpline .. they understand that this category holds the returns.
To Conclude
Real estate continues to offer promising investment opportunities in India. However, investors should do their homework, understand their risk appetite, and consult experts before diving in.
By staying informed about market trends and taking advantage of government schemes and tax advantages, investors can make informed decisions and potentially enjoy substantial returns over time.
The Author is the Founder of Hecta, a platform for buying properties from banks through auctions