Investing
Are real estate returns hyped over equity?
Sentiment holds investment in real estate very high in India. It is everyone’s dream to own real estate — a home, or a second home. While Gold and Real Estate are the much‑preferred asset classes, the Indian market has also looked favourably upon insurance and, to an extent, equity.
Search the internet and you will find plenty about people booking losses in equity and equity funds, but hardly any on real estate losses. Why is the return experience so much better with real estate?
Investing when markets peak and exiting when low
Over the last 5 to 10‑year periods, equity funds delivered a 10% CAGR in a worst case and 20% at best. All an investor had to do was buy and hold. But most people did not make this return because they tried to time the exit. Whenever there is a downturn, they struggle to keep up their SIPs and are tempted to pull out fearing a further fall. Investing when markets are peaking and exiting when low is possibly the worst thing to do with equity funds.
If an investor did the same thing in real estate, they would make losses — but they do the exact opposite. People buy real estate when they have a need, and when they want to sell into a slump they hold on until they get a better price. Real estate returns are also only tracked when realised, whereas equity can be tracked daily, which tempts investors to react.
Wrong comparison: a 100% return — but over what timeline?
A CAGR indicates the average rate of return over a period of time. If Anish invested INR 1,00,000 on 1 Jan 2010 and it grew to INR 1,95,000 by Jan 2013, the CAGR is [(1,95,000 / 1,00,000) ^ (1/3)] − 1 = 1.249 − 1 = 24.93% — the annualised gain over three years.
Apply the same measure to the home Anish bought: he invested INR 40,000 a month for 15 years, making the cost INR 72,00,000 (principal and interest). If the home became worth INR 2 crore after 15 years, that is a large gain in absolute terms — but the CAGR works out to a paltry 7.04%. If an equity fund yielded this, people would call it a loser.
Real estate returns look high because of the high investment and longer commitment periods. Comparing absolute returns, or returns over different time periods, is not wise. An investment that stays in the market for 15 years is bound to give better returns — the real difference real estate makes is the ‘need’ and ‘utility’ quotient.