Why is real estate the best asset class to invest in?

Supported by a growing economy, India is one of the youngest countries in the world with 65% of Indians under 35 years of age. In this story of India’s growth, an important role has been played by the real estate segment that has over 250 ancillary industries attached to it. The segment which was unorganised and considered risky has come a long with stronger foundations, rigid rules and better returns. 

While this bit of information was about the country’s economy, what about your personal economy? Incidentally, the real estate plays a pivotal role here too as it is presently offering better returns than most asset classes, point industry reports. Along with growth, the segment also offers a sense of security like none other. “While I was not very keen on buying a house and would have probably continued to live on rent, the favourable timing of the segment prompted me to buy a resale property more than a decade back. It was reassuring that I took the right decision, especially when the pandemic struck, and most people on rent were insecure about their place of residence. The investment by appreciating around 2.5 times seconded my decision,” says Sangamitra Ghosh, a Thane resident. 

How the real estate market is expected to growth in the next 10 years? 

For any investment including real estate having a long term view is very important. According to a report by Knight Frank and CII titled India Real Estate: A Decade From Now (2024 to 2034), in terms of output, the market size of India’s real estate sector is currently estimated at $ 482 billion contributing 7.3% to the total economic output. By 2034, India’s real estate sector is expected to expand to $ 1.5 tn contributing 10.5% to the total economic output. Factors such as growing residential demand, increase in need for contemporary office space, expanding hospitality, retail sector etc. to cater to the growing consumption needs of the growing population with increased income levels, are adding an impetus to real estate sector in India, making it an attractive asset class. 

Why to invest in real estate as asset class?

• Cash flow: The income left after payment of the mortgage and operating expenses is known as cash flow. Real estate segment is known to generate cash flow.
• Tax benefits: With investments made in real estate, you get certain benefits like 

Home loan interest deduction: According to Section 24 of the IT Act, a home owner can claim deduction of up to Rs 2   lakhs on home loan interest if it’s a self-occupied property. In case the house is let on rent, the property owner can opt for an entire waiver on interest. 

Exemption of tax on Long-term capital gains:  The revenue generated by selling a property is known as capital gains and this is taxable. If you hold the property for more than two years, and your property is registered before July 23, 2024, then you can choose to sell it with indexation of 20% or without indexation of 12.5%., whichever is beneficial to you.

• Real estate leverage: This is the way in which borrowed capital are used in real estate so that potential RoI is increased. As it’s a tangible asset, it can be used as security for loan. So, by paying 20% cost of property as down payment, one can borrow remaining 80% and still own 100% of the property. This explains how you can leverage money that has been borrowed to strengthen your real estate investment.

• Hedge against inflation: These can help in protecting you form inflation.

1) The property value increases more than inflation that helps keep pace. 

2) One can increase rental properties’ rent so that they can keep up with the rising prices. 

How has the real estate market in India worked in the last 10 years?

Source: Knight Frank 

While the new launches in H12015 was around 1,20,000 units, the sales were around a little less than 1,30,000 units. In 2024, the new launches in H12024 were over 1,90,000 units and the sales were around 1,70,000 units. 

What will work in favour of real estate presently?

Government securities denominated in grams of gold are known as the sovereign gold bonds. “With the government likely to discontinue fresh issuance of SGBs, there are chances of a higher level of incremental household savings may flow into real estate as an asset class, especially at a time when fixed income being taxed unattractively and equities being overvalued. The festival season boom could be an icing on the cake,” says Rajesh Mahadevan, an independent real estate financial advisor. Increasing salaries of people, attractive rental yields and government initiatives such as affordable housing, growth of Tier-2 and Tier-3 cities, deduction on tax on housing loans etc. have contributed to investment opportunities in the Indian realty segment.

Not volatile like stock market 

The real estate segment is not a highly volatile market like that of the stock market. While the appreciation in market cost is steady and downward movement is also not deep that it impacts. 

Better performing than fixed deposits

Fixed deposits are age old monetary investment vehicles that have always been a choice across ages. They provide returns with no market risks associated. But, to grow your wealth, one can’t depend on only fixed deposits. You need to invest in instruments that provide better returns and are as safe as these and this is where real estate steps in. These offer capital appreciation and rental incomes. However, these come along with certain risks that has to be considered. They also require much capital costs. Also, once project is in hand, maintenance costs will be something that has to be always considered. 

More emotional security than gold 

Indian women love their gold but with increasing awareness, they are loving property more than their gold. The reason is that of emotional security that a property provides which gold may necessarily not provide. For many of us, gold jewellery may be purchased and then kept in bank lockers. When you a buy a property, you have the option to decide to use or generate income from. While in case of gold, you may not have option of making you generate income for you. 

How can you participate in real estate investments?

Renting your property

You can buy a property and then rent it out, to generate a regular monthly income. While initially it may be tough and you may need to take a home loan, things will change overtime. With the market expecting to grow (as mentioned in the above report), there will come a time when the rental generated will be more than the EMI you may be paying. In this case, the long-term vision of investment proves to be true. Remember even while the house you may invest may become old with time, the value of land on which the house is built and the rent the house will command will only increase. 

A case in point is that of Raghuraj Singh, who bought a 2 BHK for Rs 53 lakh in 2013 where he took a home loan of Rs 25 lakh. He used the prepayment option and got done with serving the loan by 2019. Since then, he is earning a rent of what started at Rs 13,000 per month to now fetching upwards of Rs 25,000 per month in a loan free property. The rental yield went up from around 2.46% to 4.91%. 

Commercial real estate 

Renting in commercial real estate is very attractive because of the higher rental yields they offer when compared to residential properties. The leasing rates in commercial real estate is more and in locations where there is limited stock, the rent they command is phenomenal. They are also attractive because they have longer lease duration, promising steady monthly income. Also, there is a professional bond between owner and renter that makes the entire setup secure. 

Real Estate Investment Trusts (Reits)

You can invest in companies that own real estate spaces that generate regular income- for instance a company owning commercial spaces, malls etc. These are similar to investing in stocks where you get exposure to real estate market without owning a physical property.  There are three tyes of REITs- Equity REITs, Mortgage REITs and Hybrid REITs. 

• The equity REITs owns and operates real estate that are income producing. 
• The mortgage REITs are those that hold mortgages in real estate. 
• Hybrid REITs is a combination that holds own real estate properties and mortgages. 

House flipping

In this case, you invest in an under-valued property and then use your financial resources to renovate the property and sell the final product for a profit. While this is prevalent, it needs huge initial investment, expertise in redoing the property and there is a certain element of risk involved related to market conditions. 

Crowd funding

In this, investors come together and fund in real estate project through the Internet. While this may bring in high RoI on the investment, there are heavy risks attached. Mostly these platforms are open only to high net worth investors.

Plot

A piece of plot or a raw land may be cheaper as compared to other real estate instruments but has a high RoI, mention experts. This can be used for constructing your property and renting, do agriculture or lease it to someone for agriculture. 

Housing.com POV

In the current market situation, if you choose the real estate asset you want to invest in diligently, one can enjoy good returns, a steady source of income along with tax benefits. A mantra to remember is that think long-term about any investment to mitigate risks. Investments should also be diversified so that you can benefit out of all asset classes while building your personal wealth. So, while real estate is attractive, it is wise to diversify your portfolio into other asset classes such as equities, fixed deposits etc. to have a strong backup. 

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