This can go down as one of the most debatable investment options. Different people have different opinions on this sector.
We all have relatives who have bought a plot many years ago and have sold at much higher price. Or your uncles who have rented out one property boasts of getting monthly fixed income. We might sometimes feel why our ancestors did not consider buying a property so that we could monetize it today. Some properties in the middle of the city that where cheap 10 years back are unthinkable to buy today. The prices have soared a lot.
Consider my own neighborhood. When my parents bought the apartment we live today, they had also looked at a 5 cents plot right opposite our apartment. That property costed 2.5 Lakh per cents then totaling 12.5 Lakh for the property. This was in the year 2003. We dropped the idea of buying a plot because we felt the price was too high. Today, the landlord of the same plot is quoting in excess 10 Lakhs per cents. That is a staggering 380% increase in the value.
This is the kind of picture we always like to see. This is how you expect your real estate returns to be. Now let us paint the real picture. The area that I am living in, was pretty much a piece of land that not many wanted back then. Locals felt this was quite far from all the happening places of the city. There weren’t many transport facilities around. We had to walk a while to get to the bus stop or an auto stand. A few years later, Infosys decided to set up their STP office just a kilometer away. Suddenly, there was boom in the demand for housing around the area. A lot of Infosys employees where in search of good homes around the area. Meanwhile, city corporation started the works of National highway and that development passed just at a walkable distance from our locality. A new hospital with modern facilities came up just next to the highway. The road connectivity got better here and now airport is just 15 minutes away.
During the same time, a person who bought plots near airport assuming the prices will rise in future is unable to sell the property today. The airport runway was slightly modified for safety reasons and connection to airport was shifted to make it more closer to the city. The one who bought plot near the old airport anticipating high demand is now in a fix. Why did this happen? I still remember those days when everyone around was talking about the exorbitant demand for the properties near the old airport.
All I am trying to say here is, will you be able to identify such a locality that booms in development? Most of these are out of our control. There is some element of luck that comes into play when it comes to real estate. One’s who have prior knowledge that a given location will be experiencing a development boom will make a lot of money. Thats what politicians did in areas around Bangalore or what real estate company did in Gurgaon.
Unless there is an economic boom in the locality, the real estate prices usually follow the inflation rate. There is nothing much left to gain out of price appreciation. Moreover, real estate is highly illiquid asset class. The property I told which has given incredible returns is still unsold is available for you to purchase. Of course, the owner is not willing to sell at lower price and is not dependent on the sale of property for his living. But in any case, it takes time to find the right buyer at the right price.
Real estate was a "go to" investment plan a few years ago. One fact that we tend to miss out regarding the boom in real estate is that how Black Money had to play its part in this sector. Prices of real estates are inflated due to the existence of black money. Few years back a lot of transactions happened in cash and a lot of people had black money lying around. They had to find ways to put them into some tangible asset which grows in value. Real estate was a no brainer to them. Even today, a lot of real estate transactions happen with some percentage of cash. This has artificially inflated the price. The day black money transactions slow down especially with digitization, the real estate prices are more likely to be stagnant if not fall. When you plan to buy a real estate as an investment, do keep all of these in mind and then make a wise decision.
Look at what is happening in China. There are too many houses unsold. Same is the case in many parts of India. Builders buy huge amount of loan anticipating good turnover in their projects. They are locked in with their loans. In order to recover their losses (or borrowed money), they will tend to extract higher amount from you. The ones with black money in hand will be ready to buy multiple properties in the same building. They get steep discounts for buying more than one property from the same builder. Suddenly, there is lower number of properties to be sold. This seems as if there is high demand for the property. This artificailly inflates the price. People wiht money buy more properties anticipating further rise in prices. Once they buy it at higher price they will be selling it again for even higher price. The cycle goes on - and we are stuck with loans to pay off.
There is also another way to invest in real estate without having to invest large chunks of money. They are called Real Estate Investment Trusts or REITs. REIT is a company that owns, operates, or finances income-generating real estate. In simpler words, they pool in money from larger number of investors like us and put them into good use like buying commercial properties and rent it out to big corporates. This way individual investors earn dividends and take the advantage of price rise without having to buy, build or manage properties. These are traded like any stock and can be bought by us at as low as Rs. 300 per unit (share). These trusts earn income by leasing out spaces or collecting rents. They then have to pay at least 90% of their net earnings as dividends to the shareholders.
In the previous chapter we spoke about REITs – an alternative way to invest in Real Estate. Why is a REIT so helpful to us? For one, we do not have to invest in big chunks of money. Two, we do not have to worry about which property to buy and manage or sell when the time is right. It takes out the entire headache of researching the right property, choosing one of many and finally hoping you made the right decision. You leave it to the experts.
There are three major REITs in India - Embassy REIT, Brookfield REIT and Mindspace REIT. There will more REITs coming in future. REITs in India are just starting and is just maturing. In similar lines, few other corporates have launched Infrastructure Investment Trusts (InvTs).
We will also discuss in later chapter on buying a house vs renting a house. You will be thinking that the rent you pay is like a wasted money which you could otherwise put as EMI. But you will be surprised to see the analysis.
So now we have talked in brief about Fixed Deposits, Gold and Real Estate. One thing you might’ve understood by now is you cannot be completely dependent on any of those to be wealthy. Each of those can only be a small percentage of your investment which will only safe guards your money. They may be good at holding the value but not growing in value. Remember - lower the risk, lower the returns or higher the risk, higher the return. We must learn to balance the risks and rewards and maintain a good risk to reward ratio.
How to choose REITs?
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