Equity or Real Estate in India

It's been some time, so I decided to write a small blog post after this question came up during a discussion with a friend.

 

Is Equity better than real estate in India, or is real estate the best?

This has always been a contentious argument where people tend to side with one or the other.

I am biased in favor of the Equity markets. 

 

Real estate in India is now quite mature, and unlike the earlier times when 'land' was selling at throwaway prices and some made multi-fold returns, However, even in some of those cases, the calculated CAGR would be 15-20% over a 20-30 year period which is terrific but quite comparable to the equity market indices.

Fundamentally, land prices cannot have a return that is superior to businesses. If that were to happen, why would one actually want to set up any factory or farm as they would be better off profiting from owning the land itself?

So what works for markets:

1.One can start with very little capital and work from home or literally from anywhere in the world.

 

2.Negligible transaction costs and a completely online process.

 

3.You have liquidity(unless you are stuck in one of those stocks that's frozen in lower circuits).

4.You have flexibility, especially if you have some capital and are willing to venture into futures and options.

5.You can pledge your shares for collateral/margin and create hedged positions.

6.Contrary to popular opinion, everyone does not have to be a long-only investor. One can make money by shorting if that is your cup of tea or use market-neutral strategies in a sideways market.

7.If one industry/sector/country is not doing well, you can quickly move to another.

8.If you need money, you can sell even 1 share.

9.Well regulated & possibly a little over regulated at times, but this does not prevent mishaps. Still, nobody's perfect, and at least the regulators are making an attempt.

 

10.One can even bet on Real estate via the markets, and I don't mean just the real estate developers or REITs. You can bet via the building materials/paints/electrical goods/Kitchen appliances etc.

Now let's look at Real estate in India:(not considering someone who can undertake property development-that is a completely different animal)

1.Like individual stocks, prospects can vary vastly across different locations, and it would be incredibly naive to paint the entire sector with one brush. Investors need to study individual growth pockets.

Though in India, many new projects are announced by Governments to boost growth and development, few actually see the light of day or get completed in the promised time frame. These announcements are used by 'agents' to create fake hype.

 

2.One thing that favors Real estate, especially land, is that it is fairly simple to understand. Once someone can figure out the development patterns in an area/city, you can quickly shortlist the growth corridor(s).

 

3. However, what is simple to understand is not simple to execute and can involve many problems with execution involving complex regulation and legal diligence.

 

4.Housing loans are available at the moment at record low-interest rates and the deal is sweetened further by tax rebates offered by the Government, which works in favor of the buyer/s, loans here are at floating rates, and thus there is always a risk of a sharp rise in interest rates...most lenders are quick to pass on any hike but very slow in passing on benefits to customers, although looking at the trend of money printing we may be headed towards much lower interest rates in the longer term.

 

5.No matter what anyone says pre-launch proposals without prior regulatory approvals are not  investments, they are pure speculation.

 

6.While RERA has come, there still seems to be little someone can do if they get stuck in this predicament. There are still many lacunae in the process and poor compliance across the board. 

 

7.There is no transparency, and price discovery is highly inefficient.

 

8.Transaction costs(stamp duty and brokerage) are incredibly high.

 

9. In case I forgot to mention, real estate is hugely illiquid and will probably be worth a lot less if one has to sell in a hurry.

 

10.Rental yields in India are far lower than even the record low-interest rates.

So what do I conclude with?

My conclusion is that one can make money with both asset classes provided they are willing to put in the work(apart from some luck) but overwhelmingly recommend equity markets to someone who is looking to start their journey with wealth creation and later on as they grow their net worth they can explore other investment avenues.