Are Real Estate investments no longer attractive?

by Manali Maheshwari

Investors have been comfortable with Real Estate in the past. As a traditional mode of investment there has always been demand for it and investors believe that the prices can only go upward. But of late, investors have been shying away from Real Estate. What do the recent numbers look like?

The phase of real estate ka time aagaya was between 1988 to 1994 and 2002 to 2012 when people saw the market go up by 10 times. But after 2012, the traditional investment market of real estate stagnated.

As per a report in 2009, builders in the top eight cities of the country, sold 2,17,253 homes and earned Rs 1,31,495 crore, in the process. This means an average home was sold at Rs 60.5 lakh.  (8 cities being Delhi, Mumbai, Kolkata, Chennai, Pune, Bengaluru, Hyderabad, Ahmedabad)

Now the same report shows us that in 2018,  builders sold 2,78,989 units, nine years later, and earned Rs 2,05,792 crore. Hence, an average home was sold for Rs 73.8 lakh.

Such data shows an absolute return of 21.9% but the average returns per year is 2.22%!  

Other challenges with Real Estate investments

  1. Investment in real estate can be a life changing decision to make. These days, location changes due to jobs has become much more frequent. An investment in real estate or purchase of a home as an investment can constrain the investor's flexibility to change locations.
  2. Home loans are jeopardising your other financial goals and your salary. For example a flat worth Rs. 50,00,000 having a home loan for 20 years tenure has an EMI of Rs. 48,000. Housing cost for multiple investors come up to as much as 40%.
  3. With the recent slump in the Real Estate market, it becomes difficult to sell the property when you require the funds. Lack of liquidity is a major constraint with Real Estate.
  4. People applying for home loan face a lot of difficulties in procuring a loan from bank. The reason could be lack of required sum for down payment on the loan, required credit score, etc,.  Furthermore, dilemma in choosing the interest rate, time taken for property evaluation and the lengthy loan disbursement process.

So what are the alternatives to Real Estate?

Long term investors can consider moving to other forms of investments such as Fixed Deposits or Mutual Funds.

  1. Investing in Real Estate requires a larger investment amount whereas the investment required for FDs/RDs and Mutual Funds can be as less as Rs. 1,000.
  2. These investments are very liquid. You can withdraw them within few working days. The withdrawal procedure is not cumbersome either.
  3. Performance of Real Estate and Mutual Funds depend majorly on the growth of the economy. When inflation is a concern, Mutual funds tend to perform better than real estate over long term. If the GDP grows at 8% you can expect Mutual Funds to deliver 12% returns over the long term.