Whether one should have real estate in his investment portfolio is an age-old debate. It is a topic of discussion within the built environment of real estate across the world. Arguments on both sides have their own merits, but the fact remains that there is no ‘one size fits all’ answer. The personal finance pros believe that stock market and mutual funds rewards are far greater in the range of 14%-18% per annum. The real estate proponents, on the other hand, assert that real estate rewards are no less over a longer period, and it also saves the investors from the cyclic high market volatility.
Return On Investment (ROI) is the primary criterion in the investment basket of an average Indian. It is never the only parameter to evaluate the asset class worthiness. Let’s take a few case studies that would clarify how different asset classes are meant for different sets of investors and different mindsets.
Case Study I
Rishi’s father bought a piece of land and built a house with Rs 25 Lakh around 25 years back. Today, the cost of the house is Rs 3 Cr, a mouth-watering return in absolute terms. However, in terms of actual returns (with or without inflation adjusted) the returns are not what other asset classes like gold, stocks, or mutual funds would have given. The Compounded Annual Growth Rate (CAGR) of the property is just 10.45%. In the given period, gold returns are 12.05% CAGR. Mutual funds that have completed 25 years in India have given a return in the range of 14-23% CAGR.
Case Study II
Rashmi has a house. Since 2020, post Covid, she built a rewarding stock portfolio of Rs 50 Lakh with a CAGR return of 22%. Now that she should invest more, the natural urge is to go for high returns with the stock market. However, she opted for a commercial property that promises to offer around 12% returns. Her reasons are simple: risk diversification and to be in a position where she can liquidate any of her investment basket when needed.
The two case studies in contrast might give an impression that stock market and mutual funds are the best bet for an average Indian. What it doesn’t tell you is that every investor’s risk appetite is different; reasons for investment are different; and one doesn’t want to put all eggs in a basket.
Historically, the risk-averse Indians have an affinity for properties. The new-age investors are more risk takers and go for high-risk and high-return asset classes. But they are too prone for risk mitigation through mix and match of investment, as is evident with Rashmi’s Case Study II.
Matter of perspective
“I love taking risks and high returns but then I don’t want to put all eggs in one basket and hence after having made a stock portfolio I have now opted for a commercial property. In any given cycle of economy, not all the asset classes are equally performing and/or non-performing. Hence, I feel safe with this risk mitigation strategy,” said Rashmi.
Abhishek Kapoor, group CEO, Puravankara , asserted that stock market returns can sometimes outpace real estate, but only for the short term. Real estate remains a robust and reliable long-term investment for several reasons. First, it provides tangible assets that generate steady rental income, offering a hedge against inflation. Second, properties can appreciate significantly over time, especially in high-demand areas. Third, real estate investments allow for leverage, where using borrowed capital can amplify returns on equity investments. Also, the tax breaks available for purchasing property/interest/ principal payment while investing in a tangible asset bring additional value for the purchaser.
“In times of economic turbulence, real estate can act as a safe haven, preserving capital, and providing reliable returns when other investments may falter. Therefore, while diversification and risk mitigation are significant benefits, real estate’s inherent strengths make it a valuable component of any investment strategy. The appeal of real estate extends beyond just a reaction to market volatility. Investors are drawn to real estate for its long-term appreciation, rental income, and tangible nature. While the VIX might drive some short-term interest towards real estate, the sector’s fundamental strengths, such as its ability to generate passive income, provide tax advantages, and offer potential for appreciation, are the primary factors that attract investors,” said Kapoor.
Shiv Parekh, founder and CEO, hBits said, “India is one of the countries where people tend to save money in bank accounts rather than investing them in a return generating field. Financial knowledge on ‘where to invest’ would be beneficial if we plan to invest somewhere. Gold versus real estate is a common confusion when it comes to investment. Each of them has varying degrees of volatility and risk-return potential. Hence, before zeroing in on an asset class to invest in, it is vital to understand the pros and cons of equity versus gold versus real estate.”
“Investment is not a risk-free process, and hence, it is better to have a good understanding about risks and asset classes. Every investor should choose the right asset class to invest, depending on his own appetite for risk. Asset classes can be broadly classified into three types — real estate, gold, and equities. Equity can be stocks and mutual funds; gold can be physical, or jewellery, and real estate can be equated as property,” added Parekh.
Real Estate: Advantages
- Tangible asset
- Can never lose its intrinsic value
- Hedge against inflation
- Risk mitigation product
- Tax advantage
- Less volatile
Real Estate: Disadvantage
- Bigger ticket size
- Lower returns than equity market
- Illiquid asset class
- Holding and maintenance issues
- High transaction cost
Diversification is a critical strategy for risk management. Even high-risk takers agree that real estate investments balance a portfolio heavily weighted in equities and provide stability during the stock market volatility. Moreover, real estate has intrinsic value and utility, a fundamental need for housing and business operations, which often maintains its demand during the economic downturns. While diversification is essential, property investments offer several standalone advantages. It also offers tax benefits, such as deductions for mortgage interest and depreciation.
Conclusion
The argument over real estate versus gold or equity is meaningless, as they don’t necessarily compete. There is no ‘one size fits all’ concept and each asset class attract a different set of investors, having their own distinct exposure, mindset, risk appetite, time horizon and amount of capital to invest. What could nevertheless be vouchsafed is the fact that for those investors with an overall exposure of various asset classes, real estate stands out as an asset class of risk mitigation.
(The author is the chief executive officer at Track2Realty.)
