REAL ESTATE BASICS
Real estate has delivered good returns in the long run
Residential real estate sees abrupt growth cycles
commercial real estate offers higher rental yield but one needs deep pockets for investing
REITS give investors the option of making small-ticket investments in the sector
When it comes to building assets, especially in India, real estate attracts a large section of investors. The reason is that, unlike a financial asset, it is something investors can see, touch and feel. That is why almost three-fourth of Indian household wealth is parked in real estate and only a small fraction in financial assets. “The average household holds 77 per cent of its total assets in real estate (which includes residential buildings, buildings for farm and non-farm activities, constructions such as recreational facilities, and rural and urban land) compared to 5 per cent in financial assets (such as deposits/savings accounts, publicly traded shares, mutual funds, life insurance and retirement accounts),” says a 2017 report by the Reserve Bank of India titled “Indian Household Finance Survey.”
However, in the last few years, returns, especially from the residential segment, have been muted or even fallen. Many have even predicted the end of real estate as an investment, a view that gained further currency after the outbreak of Covid-19. However, as life slowly moves towards normalcy, there are enough signs that the sector cannot be written off as an investment. With interest rates on fixed income instruments falling and stock markets volatile, investors are seriously looking at segments such as commercial real estate, which has given decent returns over the past few years, and real estate investment trusts (REITs), whose early returns have been promising.
“Indian real estate consumers still remain positive about the economic scenario and income stability for the coming six months. Real estate (35 per cent) is still perceived as the preferred mode of investment, followed by gold (28 per cent), fixed deposits (22 per cent) and stocks (16 per cent),” says a recent report by Housing. com and National Real Estate Development Council.
Barring some periods in the short to medium term, real estate has given decent returns over long periods. However, before writing the cheque, one must understand that there are different segments within real estate, and risk, return and other factors differ in each case.
Why Real Estate
While it is true that almost everyone wants a piece of real estate, financial planners say one should invest in the sector only if it fits in one’s portfolio. “Any investment decision regarding real estate ought to be made with an eye on overall allocation of finance and short-term liquidity requirements,” says Lovaii Navlakhi, Managing Director and Chief Executive Officer, International Money Matters Pvt. Ltd, a financial planning firm. This makes even more sense during a period like this when household incomes have fallen. But the key questions are — Who all should invest? And in which segment? “One should consider real estate only after building a sizeable liquid fund through financial assets such as mutual funds,” says Varun Girilal, Executive Director, Mitraz Financial Services Pvt. Ltd.
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September 20, 2020