You invested 50% of your portfolio in real estate (residential and commercial properties) during the pandemic. How is that panning out?
It has played out really well. For me real estate has outperformed the equities portfolio. If you remember, around the end of 2020 and early 2021, the stock market had already recovered from the covid lows. But as far as real estate was concerned, there were lots of doomsday prophecies. That was when I took a contrarian view and diversified my portfolio into real estate.
This move happened primarily because I read the book Capital returns by Edward Chancellor. It said ‘the sector which will do well is a sector which has gone through consolidation among a number of players and which has seen the least amount of capital deployment in the past 10 years.’
From 2010-11 till 2020, real estate went through a terrible time with many attacks on the parallel economy due to the goods and services tax (GST) regime, demonetization and other reasons. There were so many challenges and phases whereby real estate had a lean patch but I see real estate as another way to participate in India’s economy
Around half my portfolio is still in equities and I ensure that it doesn’t go below 40-50%. I will start rebalancing in favour of equities in the next 12 months.
Did you say your real estate gave better returns than your equity portfolio?
When I say that my real estate is performing better than my equity portfolio, most people will not believe it. But I’ll tell you how it works.
If you put in ₹2 crore, then the bank can sanction you a loan of ₹8 crore and with it you can buy a property worth ₹10 crore. If you lease this property to any major bank to run a branch, then the lease is locked in for the next 10 years. Secondly, the rent goes up by 15% every three years. And imagine if you had bought this property at the bottom of the real estate cycle, during covid, then you would have done very well.
Some might say ₹2 crore in equities became ₹4 crore in the past 3 years. Now that is correct, but who knew equities would double three years ago. On the other hand, you knew that if some big bank was your tenant, then there is stability in rental income.
This seems quite unconventional as you’re the CEO of an equity oriented AMC? Can you please expand on this?
The conventional wisdom is that you should never leverage. But the biggest sector in the listed equity space is financials and they are all leveraged and help people take leverage. There is something called a ‘healthy leverage’.
I would like to reiterate here that nobody should do what I’m doing but everybody should definitely challenge the conventional wisdom or thought process.
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When did you buy your first house?
I bought my first house when I was 28, in 2004. At that time, I was working with ICICI Pru Mutual fund. The regulations then were very different and they used to give 90% financing. So when I was 28 years old, I put in ₹6 lakh and the bank gave another ₹75 lakh and I bought a house worth ₹81 lakh. By 2007, the developer gave possession of the flat but I continued to stay with my mother. I put that house on rent. That rent eased my EMI (equated monthly instalment) burden but here’s the interesting part. In 2010, I sold that house for ₹2.3 crore.
For me, real estate is a derivative of equity. For far too long, people have been saying they are bullish on the Indian economy but not on real estate. That’s completely wrong according to me. You cannot say you’re bullish on the Indian economy by being bearish on real estate.
What about your equity allocations? Did you have allocation to small- and mid-caps which have had a run-up in the past year?
We have a policy in our company that we should only invest through WhiteOak funds. We have flexi-cap and multi-cap kind of strategies. I don’t decide myself where to take specific allocation. My portfolio goes along with what our portfolio manager and fund house does. And what I’ve found is that we have been consistently at about 30-40% in mid- and small-caps and that is what my allocation would also reflect.
Among these, my highest allocation would be towards White Oak’s flexi-cap fund. In our flexi-cap fund, our broad thinking is that we will have anywhere between 30% and 70% in small- and mid-caps at all times. I’m comfortable with that. Instead of me doing all the adjustments, I leave it to my fund managers.
Are there any interesting money stories from your childhood?
That’s a different story altogether. My father died when I was 13. To cut a long story short, my mother had to take up a job at the bank because the government at that time provided a compensatory job to the family member. That time people didn’t have insurance or big corpus, PPF (public provident fund), etc. The job my mom had was a clerical one and did not pay that well. So about 20 years of our life from that time were quite challenging. In college, I did all sorts of internships and training just to pay my fees as I did not want to depend on my mom and sister.
One fine day, like the folklorist typical story, my mom found some IPO (initial public offering) documents that my dad had applied for. Those were tiny investments but for us that time, it became very useful and we used a part of it for my sister’s wedding.
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What car do you drive?
I love cars. I own a Mahindra Thar and a Kia SUV. I mostly drive the Thar. But honestly, I find it very difficult to buy expensive cars because I think it’s too much money blocked with a depreciating asset. The most expensive car I had was a Volvo, which at that time was about ₹35-40 lakhs. I drove it for about 9 years and then it was over. In a way, I’m trying to make every rupee count.
What about your retirement plan?
It’s interesting that one of the reasons why I invested in commercial real estate is that if I can slowly and steadily pay off the EMIs, then I’ll have an income for the rest of my life. Frankly, that’s my retirement plan although I don’t plan to retire anytime soon.
One more thing. You should never leverage for something which doesn’t generate income. If you do that, it means you have to pay the entire cost of leverage from your pocket. The smart leverage pays for the asset leverage. If you see, in the long term, the asset pays for itself.
What about insurance?
I have an adviser for insurance who gives advice on everything—from which term plans to buy, to health and property insurance. There’s nothing I do without advice on the insurance side. I don’t claim to be an expert on insurance, so everything I do goes through an adviser first.