International investment guru Buffett’s quote holds true not just for the baby boomers but millennials as well. Bengaluru-based independent IT consultant Sharat Chandra’s (41) says real estate comprises 40% of his investment portfolio. “I do have some investment in gold and a couple of insurance policies but I prefer real estate for income generation. I have bought flats in Bengaluru and am checking out properties in Goa for rental income,” he says.
Chandra has already earmarked a flat each for his two young daughters to meet their goals of higher education. He plans to mortgage those for an education loan, while continuing to earn rental income. He already gets ₹2.5 lakh as rent for the flat in North Bengaluru and ₹1 lakh for the one in his hometown Bhagalpur in Bihar.
Noida-based Prateek Pruthi (34), a treasury manager at HCL Tech, has invested in two under-construction properties in Gurugram to generate passive income. “I bought a 2bhk under-construction flat for ₹30 lakh directly from the builder in 2021. Ready-to -move flats of the same specification are already being sold at ₹50-55 lakh there. I’ll get possession of my flat in 2024 but I have no plans to sell it. I’ll keep it for rental income,” says Pruthi.
Millennials are no different from boomers where real estate investments are concerned. They want regular cash flows and returns that beat inflation. Yet, data by the Reserve Bank of India’s Housing Price Index shows that real estate underperforms other forms of investment in different time periods. Lending fintech firm BankBazaar did a comparative study that shows RBI Housing Index at pan-India level grew just 6.75% in the last 10 years, the worst among other asset classes such as Sensex TRI (13.2%), SBI fixed deposits (9%), gold (6.67%) and BSE India Bond Index (8.40%).
Region-specific data shows some cities do not even beat fixed deposit (FD) returns in different time periods. Real returns could be negative. “Real returns, i.e., returns after inflation, are negative in many cases if we assume an inflation rate of 6% for the period,” says Adhil Shetty, CEO and co-founder at BankBazaar. Property investment involves other charges such as stamp duty, brokerage fee, goods and services tax, loan processing fee and maintenance fee.
Rental yields, as a percentage of the house price, is less than 3% in many Indian markets in the long-term, say real estate experts. “In the short-term, net rental yields (yield after maintenance costs, taxes, and loan interest) are often negative,” says Shetty.
Realty and reality
Available data, though, doesn’t capture the complete reality, while anecdotal data sings praises of property investment. “Real estate data factors in limited locations and types of properties. Moreover, a lot of buying and selling happens in cash. It reflects nowhere in the data,” says Kohli.
Pruthi, for instance, is confident that his real estate investment will give great returns. “I do invest in mutual funds but I decided to stay away from debt and replace it with real estate, which I feel can give exponential returns in the long run. I have seen how flats sold by the Delhi Development Authority for ₹4-5 lakh in Dwarka in 1998-99 now fetch rentals of that same amount,” says Pruthi.
Pune-based Yogesh Supekar (43), however, prefers investing in non-agriculture plots and land parcels, which, according to him, can give better profits than flats or apartments. He earned 22-23% CAGR on three properties (1 flat, 2 plots) he bought in 2011, 2013 and 2014, respectively, in Pune, Ahmednagar and Bengaluru. “If you time your purchase smartly, real estate is a great investment which gives you inflation-adjusted returns,” says Supekar.
Data from Client Associates shows real estate comprises about 49% and 27%, respectively, in the portfolio of a retail investor and a high net worth individual. “Real estate should not be more than one-third of your investment portfolio,” warns Kohli.
Real estate earns good returns but equity-linked investments are better, say experts. “For instance, prices of DLF Aralias, launched at Golf Course in Gurugram in 2001, have seen a compounded annual growth rate of 11%, excluding rental yields of about 1.5%. A back-of-the-envelope calculation shows that investing the same amount in mutual funds would have given you 18% CAGR during the same period. You could sell your mutual fund holdings and buy two Aralias at current prices,” says Kohli.
Mutual funds also generate regular cash-flows. “Financial advisors can present a logical picture that shatter myths around real estate. For example, we convinced one of our clients to move some investments from real estate to financial assets after deducing that he needed 6% regular income on his corpus on an annual basis. Withdrawing it from a hybrid fund for 10 years turned out to be much more profitable than generating it via a commercial property which increased 50% on an absolute basis during the same period,” he says.
Tax benefit is another reason why people prefer real estate. If you buy a property with a housing loan, you get tax benefit under section 80-C of the Income Tax Act on the principal amount, paid in equated monthly instalments (EMIs) in a financial year. Section 24b allows deduction of interest thus paid. Moreover, if you sell a residential property, you can avail tax exemptions from capital gains on investing it in the purchase or construction of another residential property. Long-term capital gains incurred on any capital asset such as equities or bonds can also be invested to buy a residential house to avail tax exemption under section 54F of the Act.
Reits and Invits
If you are concerned about asset allocation, then Real Estate Investment Trusts (Reits) and Infrastructure Investment Trusts (InvITs) can serve the purpose. They also offer a dividend yield of 6-7% per annum.
That is the reason why Pune-based investor Sandeep Agarwal favours Reits. “Every time you buy or sell real estate, you pay at least 7-10% of the property price in stamp duty, brokerage charges and GST. This is the reason why all my real estate investments are going through Reitss. It comprises 1% of my portfolio while 3% is invested in InvITs. I aim to increase it to 10% over the next four years,” says Agarwal.
The stakes are high in physical real estate and investors need to be wary of frauds and litigation. It is better to build your financial portfolio before you diversify into physical real estate. “Verifiable institutional data says long-term returns from housing are low compared to diversified equity mutual funds. In the short-term, the net returns may not beat a bank deposit. We advise caution when making investment decisions involving big money and life savings. New retail investors coming into any heated market must tread carefully,” suggests Shetty of BankBazaar.
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Updated: 12 Oct 2023, 06:28 PM IST