Property investing seems to have grabbed the attention of every investor--big and small. As if your portfolio is incomplete without an investment in property. It seems to be infallible way to make money—never mind the long holding period. To add further halo to “property investments” there are innumerable media stories about property prices hitting the roof and how people made a killing by selling their investments at 10,20 or may be 30 times their cost. No matter of number crunching will help deter investors from investing their life’s savings in property rather than in financial markets. Invariably the most likely counter argument will be that his equity investment made in say 2007 is yet to yield profits. The 800 pound gorilla called real estate is pounding the financial portfolio of clients flat.
Interactions like these made us think as to what makes property markets tick? Why is it that it is looked upon as the best wealth creating opportunity? Why is it that a person—who has just started earning—first tries to buy a house rather than think about say his goals in life!
We recently read about a property deal worth about Rs.33 crores. The investor had bought the property way back in 1972 for only Rs. 25 lacs. Things couldn’t have been any better. Rs. 25 lacs growing to Rs. 33 crores. I decided to do some number crunching—to see if equity funds have indeed given such returns? My excel sheet showed me that the investor had earned an IRR of 13.70% only between 1972 & 2010. I would have told the gentleman that equity funds have beaten his 13.7% return comfortably in last 15 years of existence itself. Sample of returns generated by equity funds over last 15 years are as under:-
| HDFC Equity Fund | :- | 27.60% CAGR |
| HDFC Prudence Fund | :- | 24.70% CAGR |
| DSP BR Equity Fund | :- | 24.17% CAGR |
| Reliance Growth Fund | :- | 27.53% CAGR |
| Franklin India Blue Chip Fund | :- | 25.22% CAGR |
This made us think as to why this disconnect with equities even when they have delivered better returns than property over similar time frames? The fact is that equity funds have delivered returns in the range of 20%+ CAGR over 15 years. The fact is that this is significantly higher that 13-14% CAGR generated by properties located in upscale locations. Why is there a perception—built into our DNA—that property is a better wealth creator? The fact of the matter is that in case of real estate it is absolute numbers that is talked about—and never CAGR.
For example the price of a flat in Bhowanipore area of Kolkata (an upscale location) was roughly Rs. 1600/- per sq. feet in the year 1996 and is presently quoted at about Rs.9000/- per sq. feet. A flat that cost Rs.32 lacs in the year 1996 is worth Rs.1.80 crores today—a CAGR of 12.20%. However, rather than talk about CAGR it is only absolute figures of 32 lacs becoming 1.80 crore that we get to hear. To put things into perspective, if this person had instead invested in say Reliance Growth Fund that 32 lacs would have become Rs. 16 crores over 15 years! Suddenly, the appreciation made in property prices pales in comparison to the gains made by equity funds over the same period, both in absolute terms as well as in terms of CAGR!!
Virtues becomes spoil sport
Equity funds have many virtues which the property cannot ever match.
Liquidity: - It is always possible to liquidate your fund holdings whether the market is bullish or bearish. As for property—try selling one in times of economic slowdown and you’ll see the difference.
Transaction costs: - Add on cost in case of property can increase your final cost. Costs like stamp duty, registration charges, maintenance expenses can be prohibitively high.
Equity funds on the other hand with no entry load, beat property hands down.
Taxation: - NIL LTCG in case of equity funds as of now. Do you think a 20% indexable tax will be able to beat this?
Finally
There is no doubt that Indians’ love for property is very strong. There is also no doubt about the long term wealth creation potential of property investments. I also humbly state that equities are equally good if not better wealth creators over similar long period of time. Not to talk of the freebies that come with equities like tax breaks, low transaction costs, liquidity, transparency etc.
Maano ya na maano….
2 comments:
Sir,
As per my reading....being at the right place at the right time is more important. People talk about property only because they have not been able to invest in equity over the last 3-4 years, due to the beating they took in 2007-08. So funds have diverted to real estate and commodity(specially silver).
And above that, how many of us have that kind of money to invest in property. 1600/- psf for Bhavanipore was as expensive as 9000/- is.
Advantage of equity (or mutual fund as you say)is you can invest as small an amount as you can.
So...............................................................................................................................................Jai Ho Equity
Raj,
that's precisely what we wanted to point out in our article that although there is talk of great returns to be made from property, the reality is quite different.Equity scores hands down over property over same investment time frame.
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