Majority of investors in India deploy their savings into properties – they believe that real estate has delivered the best returns. That’s a myth – it is ‘Equity’ that has made billionaires. Bill Gates, Warren Buffet, Jack Ma (founder of Alibaba), Mark Zuckerberg, Azim Premji, Rakesh Jhunjhunwala, Mukesh Ambani, Sahpoorji Pallonji, Birlas and many other billionaires have made a killing by holding on to their company shares. Berkshire Hathaway was founded by Warren Buffet who is acclaimed to be one of the most successful investors in the world. Had anyone bought Berkshire Hathaway shares worth Rs. 1,000 back in 1964, the value would be a jaw dropping Rs. 1.60 Crores today which is 16,00,000%. Warren Buffet is one of the richest men in the world with a net worth of $ 63 Billion or Rs. 42 Lakh Crores, not because he bought properties, but because he bought stocks and never sold them. HDFC Bank stock is up 13,400% in the last 20 years, similar returns follow shares like ITC, Infosys, Sun Pharma, MRF tyres, etc.
Profits in Shares are tax free after 1 year and in 3 days the money will be in your account – try doing the same with properties. Ironically, why then is the penetration into equity market so low amongst retail investors? Many have the impression that investing in equity is a gamble, and that is true for traders who buy and sell shares more often than they blink! But long term investors in fundamentally sound companies have never lost their money. Also, investors expect to make money overnight in equity and begin betting on punter stocks which they hear from friends and noisy business channels. I am yet to meet one investor who has made more money by trading in shares than investing for long term.
Even now, when I ask my clients to sell a few of their properties they look at me as if I am asking them to sell one of their kidneys! Due to its tangible nature, it holds a higher emotional connect with the investors. This lack of easy liquidity, which is actually a disadvantage, comes into play. Let me explain… the most crucial bit about investments is returns. Let’s assume you have invested Rs. 1 crore in a flat in Mumbai in 2015. If you sit in a time machine and travel to 2065 and find your grandchild selling it for Rs. 117 crore, will you think that you’ve made a great investment? You’re wrong. The actual return on this investment is just 10 percent per annum, and even that is prior to the payment of capital gains tax. The post-tax return will be in single digits. It is a decent return, but not spectacular. This is how the power compounding can be deceitful.
Now the stark reality, in the best-performing locality of Colaba, the average 10-year return was 8.07 percent with the lowest being 2.09 percent (1996-2006) and the highest being 14.37 percent (2003-2013). If you look at a comparative return on the Nifty (National Stock Exchange), it is far superior with much lesser volatility. Not a single 10-year return is negative in this case. Even an Equity Mutual Fund like Franklin India Blue Chip Fund has delivered an average annualized return of over 20% over the last 23 year despite delivering (-) 40% in 2008-09. But how many stayed invested this long? It’s all about discipline.
But unlike equities, real estate prices are not published on a daily basis and hence, a drop in rates is not publicly visible. Thus, you don’t see panic selling. Because of the illiquidity, the investor also doesn’t book profits prematurely (when prices rise) as in the case of equities. Hence, real estate tends to allow the magic of compounding unlike any other asset class even if the rate of compounding is not very high.
In conclusion, do invest into properties but like always, I stress on asset allocation and recommend my investors to spread their investments and not to just get enamored with the real estate returns unless they have done a reality check on the compounding returns.