Are you going to invest in real estate.?

Are you going to invest in real estate..?

I know your answer would be yes that the people more tend to buy a property. The last week I have read the story about the deal of the iconic film actor Rajesh Khanna’s bungalow which is situated on Carter Road , Bandra in Mumbai. It considered a very posh area as it also have a sea facing location. Rajesh Khanna bought this bungalow for Rs 3.5 lakh in 1970. After 44 years his heirs sold it for Rs 85 crore. The property has multiplied by 2428 times or in other words annualized return og 19.38% over 44 years.

In Mumbai, there are many more examples of the same type of property deals which has given handsome returns. Samudra Mahal in Mumbai is another expensive property. A flat purchased in 1970 at Rs 700 per sq. feet was sold at Rs 1,18,000 sq. feet in 2013. Money multiplied by 168 times in 43 years means 12.66% annualized return.

In 1963 Godrej paid Rs 1 lakh to buy his first house in south mumbai. In 2011 the property was sold for Rs 25 crore. Money multiplied by 2500 times in 48 years. It means the annualized return of 17.70% over 48 years.

Now assume if you had invested Rs 100 in Sensex in 1980. Not it has become more than 27000. If dividend yield also include assume 2% then Sensex has delivered 20% annualized tax free return. It means sensex has beaten most expensive prime properties in the point of view return.

Good mutual funds and many stocks have delivered awesome return like 25% to 30% far superior to sensex itself. Unfortunately, in India the investor are least understood about this investment. Only about 3% saving goes into stocks or mutual fund. Investment in equity have one another benefit except tax free return. You can sell it anytime according to your need and get sell amount within 2 days. You need not to sell entire mutual funds holdings or stocks. You can sell stocks or mutual funds in the part. In the case of property you have to sell whole property and it is very difficult to sell immediate. In normal cases of property deals happens between 1 month to many years. You cannot sell in part of your flat or bungalow. You need not annual maintenance or local tax for your mutual funds or share holdings.

I observe many time when I meet my friends or investors that they are more willing invest into property instead of equity mutual funds. Investment in the flat or property always their first choice and they happily take loan for it if they do not have lump sum amount. They completely ignore the cost of acquisition of that property which is very significant. The cost of acquisition means the brokerage you pay the broker, stamp and registration duty, annual municipal tax, maintenance of the property and the interest you are paying on the loan.

Give some importance to equity as you give to real estate. Give it also at least more than 10 years and ignore bull or bear run of the market. If you hold it for more than 20 to 30 year you would be amazed at the fortune created for your retirement and next generation.

If you want more information regarding investment or you need investment services, feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

Why real estate investment is bad for long term..?

Why real estate investment is good for long term..?

In our country many investor think that property investment will give the best return in long term and it is safe. I am not expert in real estate investment. Today, I have read an article about written by Mr Ajay Shah (Professor, NIPFP). I want t o share the same article with all of you. It may be useful to all real estate investor.

Most people in India are convinced that real estate is a great asset. More caution is in order. Real estate investment is not a guarantee of profit. It is hard to be diversified, and illiquidity hampers portfolio structuring. Most important, the outlook for supply over the medium term implies that there is no great upside.

Too many intelligent people in India believe that one can never do wrong by investing in real estate. Some facts will help bring more sense. Consider investing in the best commercial real estate of Bombay -- Nariman Point -- in 1994. The price was Rs.35,000 per square foot. Today, almost 20 years later, the price is Rs.25,000 a square foot.

Over this period, Nifty produced returns of 362%. Inflation ate away 272%. Net of inflation, Nifty delivered an average annual return of 1% while Nariman Point commercial real estate delivered -9%.

This is, of course, just an anecdote. Many individual real estate investments have done very well and have occasionally outperformed equities. My point is a limited one. We should not mindlessly assume that real estate is always a good investment. We should not assume that real estate will always outperform equities -- as the above example shows things can be as bad as underperformance (compared with the Nifty index fund) of 10 percentage points per year over a 19 year period.

Why did Nariman Point underperform over this period? Because of new supply. That is the heart of the problem of real estate as an asset class. There is no long term returns in owning steel or bricks. Every time there is a real estate boom, it triggers off fresh construction. This supply quenches the boom.

Bombay is a pretty bad place in terms of availability of space, because of both geography and governance. Elsewhere in India, the case against real estate is even stronger. The government in India is slow to build roads and water supply and police stations in outlying areas. But with a lag, these facilities do come about. Ultimately, when the price of structures exceeds the price of bricks and steel, new supply emerges, which is bad for real estate prices. The rise of a professional real estate industry, coupled with access to formal finance including foreign capital, has increased the scale of supply and given bigger and faster corrections.

Some claim that India has a large population and there is a shortage of land. A little arithmetic shows this is not the case. If you place 1.2 billion people in four-person homes of 1000 square feet each, and two workers of the family into office/factory space of 400 square feet, this requires roughly 1% of India's land area assuming an FSI of 1. There is absolutely no shortage of land to house the great Indian population.

The biggest story about the future of real estate prices in India is the FSI. In most of India, the FSI is below 2. This is an abysmally small number by global standards. All over Asia, FSIs are above 5, going up to 20 or to no limit. In the long run, politicians in India will see the light and FSI will rise. A higher FSI results in lower rental rates for households and firms, as was seen in Hyderabad which was a pioneer in FSI reform. When FSI goes up, this will unleash supply on a big scale. As an example, if Bombay moves from an FSI of 1 to 2 -- which would still make it worse than the FSI seen anywhere else in Asia -- this would trigger off a doubling of supply.

These arguments are not specific to India. While datasets about real estate investments over long time periods are not easy to come by, academic evidence is slowly building up of fairly poor returns to real estate. Net of inflation, real estate tends to produce roughly 0 over long periods, while equity indexes produce significant and positive returns after inflation.

Finally there are the practical difficulties of diversification and liquidity. Most people are not rich enough to buy 50 properties spread across India. Buying and selling involves very large transactions costs and delays, and generally involves black money.

Skepticism is in order. If less than 1% of the land area of India is built out, this is enough for the entire population. There is no long-run return in hoarding bricks and steel. Real estate booms the world over are quenched by supply. The prospect of holding real estate in India is worse because FSIs are tiny. In the future, FSIs will go up, which will further fuel supply. Households investing in real estate are also hurting on account of inadequate diversification, illiquidity and the use of cash.

For more detail about any other query related investment and financial planning, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com