Real Estate Vs Equities

Real Estate Vs Equities.jpeg

Real Estate is one of the favorite investment option for Indians. It is also a popular topic in parties and functions. We have seen our previous generation buying real estate with a sense of pride & satisfaction. It is an investment culture which has been inherited in generations. With slowdown in real estate sector, the old age habit is changing and people are seen shunning away real estate .

In today’s article, we objectively compare both investment options with their pros & cons from a neutral perspective. Let’s find out more in details.

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Real Estate makes a great social discussion

Recently in a social gathering, I was having a discussion with my uncle on equity vs real estate as investment option. My uncle challenged me that real estate is the best asset class and young generation like me is confused as we run after latest trends only to loose it later. To add weight to his argument. he shared his own investment experience. My uncle had purchased residential plot in Lucknow in 1980s at ₹ 20,000. Later he got a house constructed on that plot. In year 2015, he sold it for ₹ 50 Lakhs. Twenty thousands becoming fifty lakhs. Amazing returns. Everyone in the party had their eyebrows raised in admiration & jealously. This is exactly how real estate stories are sold in India. People get influenced by fancy numbers and a public belief is established.

But wait, lets see how much is this return as per calculations. It turns out this is approximately 17% annualized. This is without considering the cost of constructing a house, maintenance, etc. If I add them, returns will come down to 12% annualized. Not so great after all.

Later I was thinking why this happens. A few reasons are lack of empirical analysis as we get mesmerized by hearing lakhs & crores. Secondly, there is no fair judgement as to what people are saying is accurate. Uncle might have sold it cheaper than 50 lakhs but who knows. Possibly in next party he will say 70 lakhs. Also, the amount of time & energy spent in maintaining a house is never mentioned in such stories. This discussion is one of the main driver behind today’s post.

Checking Real Estate Trends

For equities you can go to stock exchange’s website & get historic data which works as a golden source for all of us. Similarly, there is a government body that tracks Real Estate prices in official capacity. It also has an index called Residex which is managed by National Housing Bank under Reserve Bank of India. You can visit the website and find out loads of data for the past decade. It manages real estate data for 26 cities in India. This single portal contains data across land, flat, ready or under-construction properties in India.

Housing Index.PNG

If we look at the housing price index for last 5 years, it shows mostly a flat line indicating the trend that housing prices have remained stable during the period at combined level across India.

Real Estate Trends Citywise.PNG

However, individual city has a different story to tell. Over past 5 years, major metropolitan cities like Mumbai, Delhi NCR, Kolkata & Chennai are showing saturation to decline in real estate prices while Tier 2 cities like Gandhinagar, Rajkot, Dehradun, Bhubaneswar, Ludhiana & Ranchi are showing appreciation in prices.

Benefits of Real Estate over Equities

  1. Physical Presence: This is unbeatable edge over equities. The kind of satisfaction one gets by looking at his property can not be compared to looking at demat account statements.
  2. Useful Asset: Real estate is an asset which can be used to create more money by running a business or renting it. A piece of well located real estate can be a source of multiple business opportunities. On the other hand, equities remain within the books of custodians like CDSL or NSDL.
  3. Basic Need: Having a shelter is a basic need for humans. We need to live in a house throughout our life making it an essential need for us. Remember Roti, Kapraa aur Makaan. Same is not true for equities.
  4. Diversification: Real Estate provide much needed diversification to a person’s wealth and shows negative co-relation to many other asset classes.
  5. Less Volatility: In case of a property, it’s price is unlikely to change on a daily basis or even on yearly basis. Thus investor does not have to go through frequent pains.
  6. Inherently Long Term: Unlike equities, properties can’t be sold and bought frequently as their ticket size is much bigger and transaction is not online. This makes most investors long term oriented in real estate which often help them to create better returns over time.
  7. Sizable Gains in terms of Volume: In real estate, the gains are often not in thousands but in lakhs and crores. This becomes very sizable when compared to equities where for ordinary investor returns from one stock is likely to be in thousands or in utmost in lakhs. It is seldom in crores.

Benefits of Equities over Real Estate

  1. Low Ticket Size: For buying a stock, you do not need to necessary shell out lakhs and crores, you can buy it using few rupees as well. This makes equities super affordable for everyone.
  2. Mostly Loan Free: Equities can be bought using your own money at hand depending upon your wallet size. There is no requirement for a loan unless you are dealing into leveraged trades. This ensures that all gains are yours with minor transaction charges.
  3. Tax Efficient: Gains from equities are more tax efficient than real estate as long term capital gains are taxed at 10% which is very minimal. Compared to this, any gains in real estate will likely be more than 10% for sure and most likely up to 30% as it depends on volumes of the gains. It is taxed as per your income tax slab which straightaway will land you into 30% tax bracket in most situations.
  4. Better Returns: Equities are not only tax efficient but also likely to give you better returns in most of the cases. Only exception can be a well placed landed or commercial property. Flats are unlikely to match or beat equities over long term.
  5. Easy Maintenance: A real estate needs to be maintained, paid for the municipal taxes & bills. In case of constructed properties, they need renovation in a while. In case of equities, no such maintenance. You can continue to hold your stocks as long as you want without paying anything extra. You will pay only when you transact.
  6. No Force Majeure: Real estate being a physical asset is prone to natural calamities like floods, fire, earthquakes, etc. Other than that, one needs to ensure the possession of the property all the time otherwise property mafias can unlawfully occupy your property. With legal proceeding taking decades, this is a legal dispute which not many will be willing to fight. There is no such risk in equities. You can have as much money into equities without risk of losing it due to any force majeure. However, with advent of cyber crimes, one needs to be careful to save password to keep possession of equities.

Conclusion

Both asset classes have their own pros and cons and respective investors will vouch for the benefits of it. However, it depends upon your requirements and comfort level before deciding which one is better suited for you. A plot of land in prime location can make you super rich over long term surpassing usual returns from equities. Within both assets, there are pockets of multibagger returns as well as poor returns. If you buy a dud stock, you may not make money for decades, it is possible. These are special scenarios. If we think about practical cases, the chances of a common man getting higher returns tilts towards equities. The reason is because the average return across equities is much better placed than average return from a real estate. So you can invest according to your strengths and avoid taking risks with your weaknesses.

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