With Indian stock markets enjoying a good spell in the last ten years, it has become fashionable to run down other assets. Property investments are the favourite punching bag. You see high-net-worth folks claiming that they are ‘all-in’ on equities, with zero property investments. Others say that with city apartments offering rental yields of just 2-3 per cent, fixed deposits are better than real estate.
But if you are drawn to investing in property, don’t shun the asset based on such claims. Look at the lifestyles of the wealthiest business folks, start-up founders and money managers in India and you’ll realise that they all own property in prime locations, significant tracts of land and farm houses. Real estate is a good investment if you buy at the right time and for the right reasons.
Timing the cycle
When people tell you that so-and-so apartment in Gurgaon or Mumbai has only delivered a 6 per cent CAGR in the last ten years when the Nifty50 has given 12 per cent, this comparison is coloured by recency bias. The property market, like the stock market, moves in cycles. Real estate returns look ordinary today because India’s property market went through a big downturn from 2014 to 2020, and is just recovering from it.
Data from property consultant Anarock show that new home sales in the top seven cities, which hit a peak of 3.4 lakh units in 2014, began to moderate from 2015. They fell to 2 lakh units in 2017 with demonetisation and the new RERA acting as speed-breakers. The lack of buyers prompted builders to trim new launches —from about 4 lakh units in 2015 to less than 1.5 lakh by 2017. But slow sales pushed up unsold inventories to over 7.5 lakh units by end-2016. In 2020, Covid helped ratiionalise supply by bringing a complete break in construction activity. With sales recovering to 3.65 lakh units by 2022, unsold home inventories have moderated to 6.3 lakh units, at about 20 months’ worth of sales compared to 47 months’ in 2017. This has paved the way for a revival in property prices.
Data compiled by the National Housing Bank from mortgage lenders shows that home prices in India’s top 50 cities rose at a modest CAGR of between -0.2 and 8.5 per cent in the last ten years to June 2023. Delhi was the worst performing market while Hyderabad was the best. Should economic growth continue to prop up income levels, home prices may continue to rise from recent troughs. This goes to show that property purchases must be timed to market lows like stock purchases. If you time your purchase to the low point in a cycle (like June 2020), you can benefit from both price appreciation and rising rental income.
Plots versus apartments
Real estate tycoons ask us to consider three factors when buying property — location, location and location. Unlike the stock market where there is a certain homogeneity in trends, property prices behave very differently based on demand-supply dynamics in the micro-market or locality one invests in.
If you are looking at real estate investments primarily for price appreciation, plots of land make more sense than apartments. Though apartments yield rental income, they turn into depreciating assets after 20 years or so. But if you get lucky with plots in suburbs with good infrastructure development or connectivity improvements, they can deliver returns that rival equities. Plots owned by this writer’s relatives in the outskirts of Secunderabad, for instance, have gone up a 100-fold in the last 30 years, yielding a 17 per cent CAGR. Location is the make-or-break factor deciding whether your plots deliver equity-like or savings bank returns. Plots need periodic monitoring to ward off encroachments, so you need to buy them in an accessible location you can visit.
Apartments are not a good source of capital appreciation. But their rental income can be a useful inflation hedge. Rent can be a reliable income source for folks close to retirement or those looking for supplementary income. In good localities, even if new apartments start out with a 2-3 per cent rental yield, the rent rises in pace with inflation. Many city rental agreements build in clauses for a 5-8 per cent annual increase. The security deposit gives you a periodic lumpsum to take care of maintenance. Rental yields on apartments are not comparable to FDs because rents give you rising income over the years, and not flat interest.
Equity and debt markets can sometimes rise and crash in tandem. This risk is particularly high now, with the global low-rate regime coming to an end. If your entire net worth is invested only in financial assets, real estate is a good diversifier. It is a physical asset that behaves very differently from financial assets.
Yes, when economic strife hits, buyers can stay away from real estate too. Stock or bond prices crash in a crisis because investors immediately liquidate, but the property market usually sees transactions dry up when there’s crisis. This is because real estate is usually held by folks who don’t intend to sell it to raise emergency cash. Owning an apartment or a getaway outside the city can also act as a safe harbour when Black Swan events disrupt life. During Covid, folks who owned homes were less hit by pink slips than those living in rented property.
Investments are ultimately intended to give you pleasure. Living in your own property can be a great source of contentment. This is exactly why wealthy folks buy swanky apartments or farm-houses after amassing wealth from their business or investments.
How to do it
This suggests three ways ordinary investors can approach property investments.
# If young and seeking capital gains, buy affordable plots of land in a locality you can monitor, without leverage. Make sure you allocate no more than, say, 10 per cent of your net worth to this, as this can be an illiquid asset.
# Delay buying an apartment until you know where you plan to live and work for the rest of your life. Apartments usually yield rental income that is much lower than the EMI incurred on the purchase. Therefore they make for bad leveraged investments, especially if you don’t plan to live in them.
# If you are in your 40s or 50s and know where you wish to settle down, buy a home/apartment in that locality and move in. Minimise leverage and use your savings as much as you can, so that you don’t have to deal with EMIs post-retirement.