Why do people invest in real estate?

So you are a young Indian who earns well, has spent wisely and drive your own car, live in your own house and are able to meet daily expenses without too much effort.
Now you are concerned with the investible surplus that you have in hand and are confused whether to put it into financial instruments such as mutual funds and unit-linked insurance policies (ULIP) or whether you should buy a second house to capitalise on the current real estate boom.
“Anybody looking at real estate as an investment option is currently at least in the post 35 year age group,” says chartered accountant Raghu Marwah. “In the current scenario, other financial instruments score over real estate as a long-term investment option. The returns in the short and long term are more attractive.”

Portfolio advisor Sanjay Mittal too agrees. “Investment in mutual funds and stock markets is liquid. But investments in the property market are not. Mutual funds yield at least 40% year-on-year returns. One of my investors put in Rs 20,000 per month in the Reliance growth fund and his returns are currently over Rs 3.6 crore in 10 years.”
This is way above that in real estate. In fact, he gives a thumb rule based on the worst performing systematic investment plan mutual fund over the last 10 years. If you have invested for over seven years, returns are normally the amount invested multiplied by the number of years it was invested for.
So why are people investing in real estate at all? Where did all the hype come from? Explains Arun Vikram Goel, CEO of Dewan Housing Finance Venture Capital, “The hype around the real estate market comes primarily from speculative extremely short-term investors. They have bought at launch prices and sold as the values of each subsequent release by the developer was raised and encashed their investment in the short term. These would have yielded very high gains. Nobody who has invested for the long term has contributed to the hype because chances are that they have not exited the market and their computed returns are notional. A long-term investor should not look at hyped gains.”
Explains another property investment adviser, “At the height of the boom, I had advised various investors to put money into multiple projects and to recycle the investments for maximum returns. In fact, I managed portfolios of investors who had up to Rs 1 crore to invest by putting in the 10% that was required to book a property and then to exit when the next instalment was due. The gains were then reinvested in newer launches and the money was constantly increasing.”
But the current scenario is different. Today after almost 8-10 months of slow-down in transactions, developers are completing projects rather than launching numerous new ones. Even the rate of hike of value is steady and therefore the short-term speculator is kept at bay. Goel explains this phenomenon. “Immature markets tend to behave erratically. Initially rental markets are not stable and more users think of purchase rather than rentals.

Once the supply comes in the rental markets pick up and those who do not want to occupy, lease out property. This hike in demand brings in the speculators and short-term buyers. Finally when there is a glut and capital values stop rising, the rentals will rise. But typically yields from residential real estate investments is only 5-6% in stable markets and 3-4% in unstable markets.”
So again why invest in real estate at all? Why not only in mutual funds if you are a retail investor? “To diversify your portfolio,” says Goel. And he has a simple mantra for the retail investor:
Do not make investments on the basis of hype. In a market correction hype comes down and you get a realistic picture.
It is wise to hold a diversified portfolio with real estate as one of the options
Time your entry correctly. The hype typically starts when the peak is reached. If you enter at the peak, you will not get the best rates and you may be part of the slide
During investing for the long-term remember that returns average out. The property adviser who does not wish to be named, maintains that normally even in weak market cycles property values double in five years. So if you are in the 35-plus age group, your property value will at least double every five years and you will never lose out. However, the rate of enhancement of the mutual fund investments are greater in the short term.
Sanjay Mathur of Pearls Infrastructure says long-term returns on real estate investments can be up to 200-300% if you choose your destination correctly. If you invest in what is the periphery of the city today and hence cheaper, andif there is good economic activity there, the returns in the long term are definitely positive. Goel agrees that the choice of investment destination is important. “But real estate decisions are often emotionally driven too.
Aspirational considerations may drive the investors to look at property purchase than yield analysis alone. But if the investor reads the future potential of markets correctly, he can get good returns.
The retail investor has more to look forward too from real estate markets. The Sebi has already issued draft guidelines for Real Estate Investment Trusts (REITS), a sound financial instrument in developed real estate markets around the world. “This will open up a class of investment to the real estate retail buyer that was earlier not possible,” says Goel. He sees younger investor opting more for systematic investments in mutual funds that is more speculative but has greater returns. The REITS, expected to be functional by next year, will attract an older investor who takes less risks, but opts for steady returns.

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