Infrastructure sector plays a vital role in the growth of a fastest growing economy like India. The infrastructure sector also includes real estate where most of the private and individual investors invested their savings. This includes the primary and the secondary market where the major players areprivate investors. But in recent years, there has been a drastic drop in the demand as well as the price in this sector, especially after demonetization. But the government is giving due care to this sector by bringing alot of new schemes to recover this market. The clear implication can be seen in the recapitalisation scheme declared by the government on the last week of Oct 2017. The major chunk of this goes to the infrastructure development programme. As the prices are at rock bottom and thesemany schemes coming from the Government side,a lot of questions arise in the minds of customers. The past performance of the real estate and the recent performance in the equity market make these questions more complicated.
A lot of investors keep coming to us asking if they should invest in real estate or equity/mutual fund. But we also do not have a concrete answer as both the investments do not complement each other and have their own positives and negatives side. So, let’s look on what makes each of them a better choice of investment.
Current Real estate market
The Government’s dramatic demonetization of Rs.500 and Rs.1000 notes in November 2016 effectively nullified 86% of the country’s banknotes. This move was expected to bring the property market to a standstill, as home buyers typically pay 30-40% of a home’s value in cash and the practice of paying for properties in cash to avoid taxes is pervasive. The home prices declined to10-15 percent and land prices to as much as 15-20 percent, according to market data. In the final quarter of 2016, India’s eight major cities registered a 44% drop in sales volumes y-o-y, to the lowest level since 2010. “Those who were looking to buy property as an investment vanished overnight from the market after the cash ban,” says one of the real estate advisor.
But fears of a post-demonetization property slump have dissipated, with demand
picking up. Sales across India’s top 9 cities increased by 19% to 51,715 units in the January-March 2017 period compared to a fall of 20% the previous quarter. According to Knight Frank Global House Price Index Q2 2017, prices in the residential real estate market in India appreciated 10.5% in 12 months ending June 2017. The average returns on Indian residential real estate over the past 5 years have been 12-14% (absolute), but, of course, more granular returns are very city and micro-market specific.
Real Estate or Equity/Mutual Funds, which one is better?
This is a billion-dollar question which is hard to answer, but the real answer can be given only by the investor, that is you. There are lot of factors which influence this investment, the only thing which we can do is to analyse each instrument and list out why one investment is better than other and vice versa.
When we usually analyse an investment tool the following points has to be checked before we select the instrument.
Most of our investors are comfortable on real-estate as an investment instrument. They perceive this as an instrument which gives high returns when comparing to other areas of investments. But, is it really giving the higher returns when comparing to other areas of investments. Let’s have a look.
In the second half of year 2000, anybody could easily buy an apartment of 1000 sqftin the city limits of Bangalore for Rs.20,00,000, which on the current real estate market can be sold for Rs.1 cr. On the first look it seems to be an awesome investment where the money has grown more than 3 foldsin a less span of 17 years.
Now let’s compare with the investment in a large cap fund for eg:- HDFC top 200 fund for the same duration.
So, this gives a clear indication that the returns what we see in the real estate is just a perception, it is also influenced by the amount of money we invest in real estate. If you are planning for a speculation in real-estate, then this return varies along with the risk associated.
Risk associated with the returns provided
The investors who argue real-estate as the best investment usually think that it is the least risky investment too. This is due to the fact that there is always demand for real estate and historically the prices have been going up sharply. There is hardly been any instance of prices of properties dropping drastically. This makes real estate the most obvious investment option.
But realty is that, it is a matter of perception. The fact is that both equity mutual funds and real estate both belong to the growth asset category. The performance of both real estate and equity mutual funds as an asset category majorly depends on the performance of overall economy. If the GDP grows at 8% you can expect real estate to grow at 13-14% and equity mutual funds to grow at 15-17% in the long run.
The mutual fund sector works on a transparent and regulated market. The SEBI acts as the regulatory for the whole mutual fund market, who on time to time will initiate new regulations for the smooth running of the sector. The regulatory has made sure that the whole mutual fund market will be transparent to the investors who invest on the funds. As a part of this, the fund houses will publish the daily NAV of each fund in their website as well as on the major newspapers.
On the other end, the real estate market is an unorganised market with less transparency. The secondary market purely works on the demand pricing. There is no regulatory bodies which regulate the whole market. Now the Government is coming forward with lot of new regulations to make this market more transparent to the investors.
The Equity/Mutual fund can be liquidated at any time depending up on the character of the fund the investor holds. But in the case of real estate, the liquidity depends upon the market demand and other market factors in the market. If market sentiment is against the investment, then the liquidity in real estate will be difficult.
Both the instrument provide tax benefit to the investors but in two different fronts. The real estate give tax benefit to the investor at the time of investments while at the time of sale of property it attracts capital gain tax on the sales proceedings.
On the other hand, the mutual fund gives tax benefit on the investment time depending up on the fund you choose. But if the investment is more than 1 year, at the time of redemption the whole amount will be tax free.
“Make Hay While the Sun shines”
The clouds above the real estate sector are slowly moving out. This is clearly visible by the new initiative put forward by the Government. As the fears of demonetization has faded out, the recovery is slightly visible in the market. A large part of this recovery is being driven by the affordable housing segment whose share of total launches rose 22% owing to its recently received infrastructure status. The government have also allowed FDI of up to 100 per cent for townships and settlements development projects. This attracted more investments towards this sector,as per the latest data real estate stands 4th largest sector in terms of FDI inflows FDI in the sector stood at US$24.54 billion from April 2000 to June 2017. It is estimated that the sector grows to US $25 billion by FY 22. By 2028, India’s real estate market size is expected to increase by 7 times reaching US$ 853 billion, an increase from US$126 billion in 2015.
In the regulatory part the government is putting forward 10 key policies for real estate sector in 2016, namely:
Real Estate Regulatory Act
Benami Transactions Act
Boost to affordable housing construction
Interest subsidy to home buyers
Change in arbitration norms
Service tax exemption
Dividend Distribution Tax (DDT) exemption
Goods and Services Tax
PR for foreign investors
Both these investments instruments are powerful options and one should understand their financial goal before making a choice between the two. The returns should not be the only criteria for the selection process as it depends on various other factors that are related. Adequate research in the investment option combined with a clear understanding on your financial goal, along with the investment horizon, will help you make the best choice.