In India, the choice of investing in real estate or stocks is driven by many factors, bordering from emotional indulgence to pure gamble.
Where to invest between these investment avenues is an answer you will need to find depending on some factors in your financial planning process, namely asset allocation, future financial goals and risk taking capability.
Let us do a quick run down on the perceptions investors have and whether you should invest in real estate or stocks.
The Case for Real Estate
Investors find real estate tangible – the can see it with their own eyes. This offers a very comforting feeling to investors – they think they can see what they are buying. This gives them a sense of security. Real estate is something which the investor comprehends better. Or so it seems.
Real estate also has a very emotional angle attached to it. Indians generally buy a house to live in. Owning a house was a very ambitious and once in a lifetime event for parents of the earlier generation, so owning a house today is a goal for almost every investor.
It’s a decision supported by the elders in the family very strongly irrespective of whether they understand the pros and cons of investing in real estate or for that matter any investment class.
There have been innumerable stories of how people made tons of money by buying real estate in the early 2000s. It’s true that the real estate boom in India made many a middle class person rich as far as home equity is concerned.
Going by these stories, every one thinks they still can make a killing by investing in real estate. Coupled with the price appreciation is the fact, or maybe a notion that a consistent rental income can be easily got from a property. For these reasons the middle class investor chooses real estate more easily.
Real Estate or Stocks – Time for a reality check. !
Firstly, the property market in India sucks. There are no regulations in place and builders are making hay duping investors. The correct price of an apartment can/is never known. The correct price unfortunately comes to be the price which builders and real estate agents drive as sales in a vicinity.
But that might not be the right price. Its the builders who give the notion that the market is stable and that it will only rise. Gullible investors believe them and are rest assured that their investment is safe. They feel safe with their money invested in properties.
Secondly, like all other asset classes, property also has its ups and down. Its not true that it will only go up. Remember the 2008 2009 property slowdown ? If you happen to catch real estate at the upper end of the sine curve, it will be a long time before you can recover after a slump. And remember, the property market is not a liquid one. If you want to liquidate during a slump, it’s not going to be easy.
Which makes us move our focus to equities.
The Case for Stocks
The stock ticker is every investors nightmare. Every fluctuation can make his investment go up or down. It’s this visible fluctuation of his net-worth that makes the investor stay away form the stock market.
Over a short period of time, the stock market could cause a few heart attacks but over a long period of time, it’s the winner. But many investors don’t know that and they think the stock market is a gamble den. It sure is, only over a small period of time though. Investors focus on too many stock news and get carried away by the greed of short term profits.
It is the uncertainty of stocks over a short period of time that makes them wary. Investors get less inclined to the stock market for this very reason.
But investors forget the advantages with stocks. Stocks are very liquid and can be bought in small amounts of money. It is very obvious that you can achieve diversification with stocks more easily than with properties.
If investors choose the right stocks or take the systematic investment planning route of mutual funds, they can be rest assured that they will reap riches from the stock market.
Take a look at what the Indian market has offered between real estate and stocks.
As you can see, equity is the winner while property is not much behind.
Real Estate or Stocks – So what should investors do ?
Invest in these two asset classes depending on your asset allocation. You cannot miss out on real estate – the famed Peter Lynch said that the first investment one should make is invest in a house. So by all means, indulge yourself.
It is generally advised that a person should not have more than 45% of his networth in real estate. Of the rest, follow the (100-x) thumbrule to invest in equity and debt.
That’s as good as it gets – what’s your take ?
Nice writeup! I completely agree with your viewpoint.You have sumed up so well in the last 2 paragraphs.I love writing so wanted to just add couple of paras, hope you won’t mind it.
I once read in an article that over 90% of per capita household savings in India make it to the fixed income investments and only 10% reach the equity markets.In todays market, most of the volume the equity indicies are driven by FII giants and hence prone to carbon copy the trend of bigger markets.With India becoming a younger country with every passing day, this is all set to change as more and more domestic money would find its way into our equity markets and would probably one day outnumber the FII volumes.Mutual fund industry is set for some real big growth numbers in the years to come.I am a strong believer that the equity markets will keep giving sustainable returns for many many years to come.The fundamentals are strong, the seeds are planted and our future generation is set to reap some fruits.Though, complacency should be avoided.Focus and discipline should be the way to go.
One things which you did not emphasize on is dividends.Value-picking in equity and reaping dividends should go hand-in-hand.I know of so many families where the parents have passed on the equity shares to their sons/daugthers, only to be told to never sell these and reap benefits by virtue of only divendends.I remember in Mar 2008, Tata Steel was market prices Rs 161(face value 10) and with a history of 100% dividend, the dividend yield was even challenging the treasary bond interest rates.Now-a-days with higher P/E ratios the dividend yield have dropped to around 3-5%.
Real estate investment indeed is a big hassle and requires higher-magnitude cost.I completely agree with your point of no disciplined regulatory is in existance for real estate.Builder are still the king and the consumer don’t have much control.Probably one of the very few investment regimes where the consumer is being at the mercy of the producers.Real estate rental yields are also in the range of just 2-3%. Real estate are also not as liquid in nature. All in all, apart from the tangible aspect which you mentioned, real estate may not be as appealing as a equity investment.
I was once told that it is impossible to time the market to perfection. Timing the market to perfection is like catching the last compartment of a moving train, more often than not the train would be missed out. I love Systematic Investment Plans for this very reason.And I totally agree with your statement “If investors choose the right stocks or take the systematic investment planning route of mutual funds, they can be rest assured that they will reap riches from the stock market.”
Lastly, I wanted to share this.I picked up from Robert Kiosky(Rich Dad, Poor Dad) that the first house is a liability(this is not any asset) and hence should not be counted in your networth. Not sure how many of us could plan for buying a second house(asset???)?
What is the reference date for the statistical figures which you have published i.e. courtesy Rediff India?
@D. Bahroos, Dhiraj, your writings continue to amaze me. Why would I mind your thoughts here – they are more than welcome. Have you seriously thought about blogging ? If not, you could do some articles and we could publish it here !
Yeah, the first house is always considered to be a liability. There are 2 schools of thought about counting it in the networth – some say you should and some say you should not. Many Indians I know of as friends buy 2nd and 3rd houses, simply because they understand real estate dealings as apposed to equity. They then rent it out and obviously the rent is not even 60% of the EMI they pay each month – this is when they are disappointed because their expectation was that the rent will funnel the EMI.
I will add the stats figure date which I took from rediff.
I am on your side when you say you like SIP – I will also borrow your line “Timing the market to perfection is like catching the last compartment of a moving train” and use it in my future articles – hope that is fine.
Agree with your point of dividends and will include henceforth in my musings. You are right about the rental yields being between 2-3%.
Thanks for your contribution.
@TheWealthWisher,
Thanks a million for the lovely compliments! I have no degree in financial segments, I am engineer by profession. I did still love to write an article or two. I shall try my hands out on it in my free time, if at the end it does make any sense, I shall email you.Then you could decide if it really makes any sense.
You are free to borrow any lines :).Enjoy your week.
Very nice comparision. I think I would agree with you when you say that real estate is a much preferred option for the middle class. Its very heavy on the wallet too. Equities return more but then they are risky. Thanks for the article.
Very well put I must admit.
I think investors should take a bit more guts and invest in shares, after all it returns you the best after many years. I think one home is ok to buy, more than that people like me will not be able to afford – homes have become very expensive. How can one person pay so many home loans ?
interesting article and interesting comments :).