In India, the business of real estate segment is mostly driven by emotion. Of course, your first home does not fall in this category. Being an old practice, many people still find real estate as a lucrative way of reinvesting the acquired asset to garner profit in the future. It is also considered to be a convenient asset that can be liquidated in future to meet certain big expenses.

Unfortunately, reality is exactly the opposite. Like every other asset class, real estate too has its negative and positive aspects. If you are planning to buy real estate in form of a long-term investment then you must go through the article before jumping on the decision.

If we go by facts and numbers, creating a diversified portfolio of high quality debt and equity (stocks) compared to investing in real estate, may bring you better returns. Well, debt and equity market also has fair share of risk and unpredictability involved. Real estate is highly vulnerable to external capital flow.

Current Market Scenario of Real Estate in India

The real estate price appreciation is slowing down and trending downwards in multiple regional markets during post-demonetization era. As black money sources have dried up, transparency drive is on, the property market is facing poor time. However, this trend is not new. The properly prices are coming down in metro cities, especially in NCR and Kolkata, since 2014. The prices are below 2007 level in terms of real negative return.

Among tier-2 cities, Coimbatore went through a slump too. Get a clear picture from RESIDEX, a housing price index, launched by the National Housing Bank (NHB), the regulator of housing finance companies.

The situation is equally grim in global scenario. For example, the real estate sales in London, England fell 20% in last 4 years, subsequently asking prices for homes recorded biggest fall this decade. The city of Toronto in Canada is also witnessing massive slowdown due to interest rate hike, curbs on foreign buyers (inbound capital flow) and introduction of provincial taxes.

Why Real Estate Is an Unpredictable Segment

The real estate market has always been dependent on external capital flow. Being a high spending sector, this segment requires buyers to have convenience of having enough liquidity to spend. India is the highest remittance receiver in the world followed by China. Kerala tops the chart for having sent highest number of workers to the middle-east and making remittance covering 36% of the state GDP.

In Kerala, families of migrant workers or returned migrants are the major property buyers. For some years, Gulf-flow-of-money is slowly narrowing and so is the property market there.  

Globally, remittance is coming ahead of FDI and that is not a good sign as remittance does not providing sustainable support to economy. Its flow is meant to come down at certain point which reverberates in the real estate market and pulls down the prices. As a result, you do not get the desired returns from investing there.

Numbers do not lie; you can monitor fluctuating Housing price index, covering 50 cities, across 18 different states done by NHB. First graph below shows HPI for the four metro cities/regions, and second one for selected tier-2 cities. HPI data identifies 2007 figure as base index (100) value. 

The reasons are further elaborated in the next part.

Things You Should Consider before Investing in Real Estate

  • Real estate is considered as an underperforming asset class as returns are same as in FDs for over 30 years.
  • Returns cannot beat inflation unless you are very much involved into buying and selling properties.
  • If you rent your property, returns will be 2-5% of the total asset valuation. It would be less than the returns from your FDs and EMIs. Again, 100% occupancy of the property is not guaranteed in order to get rent.
  • Property market is highly unpredictable as you can hardly expect a windfall gain unless property is well located.
  • Liquidity is often not guaranteed because property deals take time and does not yield right value if sold in hurry. Family disputes and litigations often extend the time span.
  • You need to spend certain amount of money on a yearly basis for the maintenance (tax and bills) and upkeep of the property. On the other hand, furnishing or decorating property does no increase its value.
  • If your finances are not in good order and you are not good with finances do not go for it.
  • It would be unwise invest in properly considering the return trend of last 15 years. Do your homework diligently.
  • Public sector banks are reeling under the problem of increasing NPAs (Non-performing assets), and they may be forced to tighten scrutiny on loan requests as part of increasing their balance sheet quality.
  • The project finance norms have been tightened by SBI and other banks may follow the suit. This sector always has transparency issues.
  • Your asset allocation must be diversified along with real estate.
  • Before initiating investment, understand the risks/downsides associated with real estate sector and do not exceed your asset allocation beyond 20% of your total net-worth.

If real estate is your choicest destination of long-term investment then closely analyze whether it will be able to meet your financial goals and fetch desired returns.

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