Don't shun equity for real estate now

Last Updated: Sun, Apr 07, 2013 06:47 hrs

Sharad Rai (40), a senior manager with an IT firm based in Mumbai, has been a regular visitor at property fairs, of late. He wants to invest in real estate and sell a few years later when the price of the property will appreciate. This decision is based on his experience in investments in equity over the last few years. Due to the volatile equity markets, he did not get double digit returns he was looking for. In fact, his equity investments are trading in the negative. Enthused by the growth in property prices in Mumbai in the last few years, Rai is ruing the fact that he did not invest earlier. Besides, all indications are that it will take some more time for the equity markets to start doing well.

A lot of investors like Rai who had been patient for long seem to be getting restless what with the BSE Sensex having delivered less than 5 per cent annualised returns over the last five years. This is in contrast with the property market where in select cities the growth rates have been in the range of 15 - 30 per cent. However, 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 the purpose of investing in equities 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, you 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 for fear of getting left out or missing the bus. Just because there is an increasing trend of people investing in real estate does not mean that you should 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 and so on.

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. At times, depending on the location, getting decent rentals might also be difficult.

Lack of standard benchmarks : 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. Similarly, for direct equity investment too you can judge the company by its profits, debt-equity ratio and so on. But there are no such benchmarks nor any reliable indicators for real estate. Therefore, selecting the right property, builder and projects 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 the Equated Monthly Installments start, 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. But in the case of real estate, more than 80 per cent of the properties are purchased with the help of loans.

A fall in equity markets may only nationally reduce the value of your investments. In times of distress or job loss you can even stop the SIP payments. But in the case of real estate you will have to pay the 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 provided the selection of the property is right and there is good cash flow to support the purchase. But just as you would not sell the property if the rates have fallen, similarly, do not sell your equity investments under present market conditions, unless the equity schemes are underperforming consistently.

The famous investor and businessman, John Templeton had 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!


nohup.out It is easier to exit equity investments than real estate

nohup.out Past performance of MFs, companies' balancesheets can indicate returns; no such benchmarks for real estate

nohup.out In times of distress you can stop your SIPs; you can't stop your home loan EMI

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