Sunday, August 2, 2015

Real Estate- Investing


Investing in Real Estate has been a global favourite. The belief is that prices can only go higher. Most of the people think that investing in equities is risky, stock prices can fall dramatically and erode wealth. They believe that if investment is made in RE, the asset stays forever and prices can only move up.


However, since the last ‘bom’ which collapsed in 2008, most of us have burnt our fingers. I know of instances where people who booked apartments in 2007-08 are now staring at same to lower prices in many cities. We may have stray examples of some locations where money has tripled in this period, but those are exceptions rather than the rule.

I was looking at a Real Estate Index named “Residex” that has been developed by the National Housing Bank. I am sure many of us may not fully agree with that. The index has a base of 100 for the year 2007. I have added the annualised return based on that numbers for each city.

CITY WISE HOUSING PRICE INDEX





CITIES
2007 Index




July-Sept



2014 Index
Annual returns
Hyderabad
100
93




Negative
Faridabad
100
216




11%
Patna
100
153




6%
Ahmedabad
100
217




11%
Chennai
100
362




17%
Jaipur
100
101




0
Lucknow
100
196




10%
Pune
100
242




13%
Surat
100
160




7%
Kochi
100
88




Negative
Bhopal
100
232




13%
Kolkata
100
209




11%
Mumbai
100
238




13%
Bengaluru
100
109




1%
Delhi
100
189




9%
Bhubaneswar
100
197




10%
Guwahati
100
160




7%
Ludhiana
100
146




5%
Vijayawada
100
161




7%
Indore
100
188




9%
Chandigarh
100
174




8%
Coimbatore
100
180




8%
Dehradun
100
188




9%
Meerut
100
159




7%
Nagpur
100
180




8%
Raipur
100
165




7%

(Source:NHB-http://www.nhb.org.in/Residex/Data&Graphs.php )

As per the table, Chennai shows a return of 17%. I wish it were true. It is for some prime pockets in Chennai, but if you look at the new extended Chennai along OMR or GST Road, the returns are closer to zero! And this does not factor in the property taxes and maintenance you have paid, if you got posession of your flat. You may say that you got rental. But if you honestly sit down and do the numbers, pay the taxes on the rents, the returns are not going to change much.

And from these index numbers, we have to deduct the capital gains, add the transaction costs. And it is an AVERAGE number. Some properties would be higher, some would be lower.

And unlike investing in shares, you cannot exit part of your portfolio. You will hang in there thinking that one day the property will come back to your purchase price. And in the meanwhile, your wealth keeps eroding. If you think you are smarter than the rest and will beat the averages, good luck to you.

Property as an investment is an inferior choice. Yes, we are socially designed to buy one own home. We probably consider our first home as a necessity. Given today’s unaffordable housing, even that requirement needs to be re-evaluated. Maybe rental house is a good option rather than buying a home for a couple of crores in the metropolitan cities.

And more important, properties are illiquid, unless you are in a prime location, where there is not much supply coming in. And do you factor in the interest loss when you buy an under construction house till you actually get the posession? Do that and the maths will frighten you.

Today, there is an over abundance of unsold homes. And the funny part is that prices are still not cracking. Banks have lent huge amounts to the construction sector and are staring at NPAs. Something has to give. Many cities will see price corrections of significant magnitude. There are many projects that have been scaled down. And projects are taking longer to complete. The money backing the construction industry must be worried.

Think hard before you buy a property for ‘investment’. And unlike the past, the newer properties come with more and more amenities and facilities, making old properties unattractive. This means that as properties age, their resale would be difficult, especially if it is a high priced apartment. Some one who can put in a couple of crores would go for a newer construction rather than settle for an older one. The older one will find it difficult to find buyers unless there is a significant discount.

3 comments:

Srinivasan Krishnan said...

The NHB Residex data for Chennai is wrong, Chennai has had growth in some very small pockets as you have pointed out. The growth has happened in the outskirts around 40 Kms from CBD / City Centre which started out from an extremely small base in 2007, hence THE spike. At best Chennai should be around 180 to 190 mark over a 7 year period. It can only go down from here with excess inventory and very few takers

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Padma suresh said...

Thanks for the information... I really love your blog posts... specially those onBuilders in Chennai