MUMBAI: Nowadays coffee conversations with friends have changed. Being in the personal finance industry, friends always tend to ask – Suggest a good place to invest? Should I invest in Real Estate now? How does Real Estate look? Or, “Did you hear, she sold that flat recently? She had bought it for Rs 80 lakh and now sold it for Rs 2 crore! What an investment that was?
Being a financial planner has its upsides and downsides. The upside is that one can see and understand that real estate is a growth asset just like other growth assets. It will behave just like other growth assets i.e. move in a non-linear fashion as regards both, returns and risk. Essentially, returns from growth assets will be lumpy and will not show predictable behavior like bank fixed deposits that grow year-on-year. The downside on being a financial planner is trying to explain this concept of lumpy returns to friends and family, especially when residential real estate has been pretty much a one way street of positive returns year-on-year for the last decade.
A whole generation of Indians has grown with the experience that Real Estate prices cannot go down. The belief is Real Estate is not risky as prices only go up.
In behavioral finance, this generation is going through what we call recency effect. The euphoria that we have seen as far as Indian real estate prices are concerned, is seeming to blur the fact that the prices today may not really be going up but just staying stagnant. Given the way inflation has been in India recently, that by itself means that your investment is losing money.
So, how does one really look at Real Estate as an investment? What would be the factors to keep in mind?
Real Estate should be a part of your portfolio and not the whole
Do not put all your eggs in one basket. In our client interactions, very often we find that a lot of clients put most of their life’s savings into real estate. This would be challenging, if this sector does go through a downturn. Investment in real estate therefore, should be a part of your portfolio. How much? – would be something that your financial advisor would be able to guide you on.
Real Estate has its risks – liquidity, no easy exit routes
The recent liquidity crunch and falling sales faced by developers are bringing to fore the illiquid nature of this investment avenue. The National Housing Bank’s Residex, which shows housing prices across India, points to a drop in prices in the Apr-Jun 2013 quarter, across 22 cities as compared to the previous quarter.
Due to the supply glut in the market, investors looking to sell would find it tough to do so. While investing in real estate, make sure that liquidity is not a feature that you need for this investment.
Real Estate investments tend to be big ticket, thereby adding risk to their nature
Uptil now for most Indians, investing in Real Estate meant that they have to put in all their life savings, and all other investments into this one big investment they make. It also meant that all other life goals and investments towards the goals would be in jeopardy. This big ticket investment again is usually being made without much professional help.
This could be addressed once REITs (Real Estate Investment Trusts) come in.
The Securities and Exchange Board of India (SEBI) has recently proposed introducing REITs in the country. These REITs would use investor’s money to buy real estate for capital gains and rental income. The proposed REITs would provide the Indian investor an avenue to invest in Real Estate which is both professionally managed and also has exit routes, as they would be listed.
Therefore, it is crucial to align your Real Estate investment strategy with your overall financial plan.