Don’t shun equity now for real estate
Mr. Sharad Rai (40), a senior manager with an IT firm based in Mumbai, has been visiting a few property fairs recently as he intends to invest in real estate purely with the intention of cashing out after a few years with handsome returns. Last few years of volatile equity markets have not yielded the desired double digit returns for him and in fact his equity investments are trading in the negative. He has been enthused by the growth in the property prices in Mumbai in the last few years and is ruing the fact that he did not invest earlier.
Considering the present state of the Indian Economy a lot of analysts have indicated that it will take some more time for the equity markets to start doing well. A lot of investors like Mr. Rai who had been patient for long seem to be getting restless what with the BSE Sensex having delivered less than 5% annualized returns over the last 5 years. This is in contrast with the property market where in select cities the growth rates have been in the range of 15 – 30%. Before exiting the equity asset class and jumping into real estate there are a few things that one needs to consider.
- Financial goals: What was your purpose of investing in equity in the first place? Was it for your children’s education, retirement or just wealth creation? Before investing in equity, one should know that there could be long periods when the markets might not go anywhere but the reward for holding on to them in the longer term can be in the form of double digit returns which are also tax free. If your intention was retirement planning then depending on your cashflows one can take a decision of investing a part of the surpluses into real estate in order to enjoy future rental income or capital appreciation, which ever the case may be.
- Don’t follow trend: If your financial advisor has suggested equity as a part of your asset allocation, then stick to it. Do not invest by following the herd mentality of moving into assets or instruments which are in vogue. It’s very natural to follow others lest one might get the feeling of missing the bus. Just because there is an increasing trend of people investing in Real estate does not mean that you too sell your other investments and do the same. One needs to asses factors like cash-flows, down payment, loan payment capacity, cushion of other liquid investments for emergency etc.
- Liquidity: Exiting equity investments is far easier than exiting real estate. If the selected property and location is not right, then getting the right sale price and buyer might take more time than you can imagine. Even at times, depending on the location, getting decent rentals might also be difficult.
- Lack of standard benchmarks : Unlike in equity mutual fund schemes, where you can consider past performance of several schemes for which reliable data right from 1994-95 is available and is tracked regularly, there are no such benchmarks nor any reliable indicators. Therefore selecting the right property, builder, projects, etc becomes difficult at times. Secondly with the slowdown in the economy a lot of projects are getting delayed, which means longer periods of interest payments before EMI’s, which in turn increases your overall costs.
- Use of leverage (loans): To invest in equity, one can start systematic investment plans from surpluses and conveniently accumulate corpus for various financial goals while in the case of real estate, more than 80% of the properties are purchased with the help of loans. A fall in equity markets may only notionally reduce your investment value and in times of distress or job loss at the most you can stop the sips. But in the case of real estate one has to pay the EMI’s even if there is a job loss or other financial emergencies.
For those who can afford to invest in real estate, it can be a good investment if the right assessment is done before investing in one and is supported by good cash-flows. But does one sell the property if the rates have reduced? Similarly do not sell your equity investments under present market conditions, unless the equity schemes are not performing consistently. John Templeton famously said “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell. So till the investment atmosphere becomes highly optimistic, hold on!
Steven Fernandes, Certified Financial Planner
Chief Planner, Proficient Financial Planners.