What promises greater returns: Realty or other asset classes?


While real estate has lost its shine as compared to some other investment classes, over the past few years, one should also consider its long-term prospects and invest according to one’s needs

When it comes to investments, most people have two main expectations – that the investments should preserve their hard-earned money and also grow, to meet their financial goals. If one needs to beat inflation, while also keeping the capital safe over the long-term period, the two major asset classes that stand out, are real estate and equities. However, investment in these assets are not free from risks in the short term.

In real estate, an investor can choose to buy land, or an under-construction or completed apartment, or a commercial property. Besides these direct routes, one can also participate in realty, through professionally-managed real estate funds. The advent of online sites have empowered investors, by providing information on projects and also linking buyers to sellers.

See also: Will investing in land always get you higher returns?

“The abundant stock available in the market and high interest rates, have made real estate one of the worst-performing asset classes in the last two years,” points out Suraj Nangia, partner at Nangia & Co. “In comparison, the equity market has flourished, backed by the government’s pro-development stance and has given returns of over 30%. Nevertheless, real estate investment trusts (REITs) can be a potential game-changer for the sector. REITs, being quasi-debt-equity instruments, are attractive for risk-averse investors. They provide twin benefits of yield, as well as capital appreciation. For developers, it could improve transparency, smoothen volatile property cycles, and potentially lower the cost of capital,” he elaborates.

 

Advantages of investing in real estate

As land is a limited resource and the Indian population grows, the demand for realty can only increase. Consequently, realty, as an asset class for investments, should provide growth. Moreover, rent from a house property, can serve as a regular source of income. It can negate inflation and be used to plan one’s retirement. “Investments in real estate and equities, have given the highest returns, of over 20%, over the last two decades. Real estate has been a preferred investment option, since liberalisation,” adds Nangia. Realty is the only asset class, in which leveraging (investing with borrowed money) is encouraged, with easy financing options and attractive interest rates. Moreover, investments in realty also offer tax benefits.

 

Challenges in real estate

Exiting an investment in property, can be painstaking and time-consuming. Realty investments also require high capital, whereas, one can invest in other asset classes, even with a small amount. The transaction costs in real estate investments are also high. For example, the buyer has to pay stamp duty, registration and other charges, which can amount to 10% of the property’s value, in some cases. Transparency is another major issue and one has to conduct thorough due diligence, before signing the deal.

 

Is it the right time to invest?

It is advisable to be present in multiple asset classes, at any given time, rather than trying to time one’s entry into an asset class, maintains Ramkumar Mahadevan, a finance professional and a real estate investor. “For wealth creation, investors need to allocate their funds smartly, between different asset classes, including realty, equities, debt, gold, etc., based on their needs and risk appetite. If an individual’s asset allocation is skewed heavily towards realty, it should be rectified over a period of time, through regular investments in other asset classes,” he concludes.

 

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