State of the Real (estate) Asset
Although today was a day of a 6% fall in the sensex (and Indian retail investors hold only 2% of their assets in stocks), I decided to write about something that is more dear to us - real estate!
Most investment savvy people have invested in some form of a property over the last decade. A few lucky ones have even cashed out on their investment at returns unimaginable in the years since the economic liberalization of India (1991). Now that the talk of the town is a stagnating realty market, let us examine the actual state of affairs.
The Boom Years
From 2007 to 2013, property prices escalated so high that people were shunning all other forms of investment and going full steam on property. Although GDP growth was cited as a reason for the boom, the primary driver behind the maddening realty price was the QE (Quantitative Easing) carried out by the US Federal bank from 2009 to 2013. When QE eventually slowed from 2013, easy money vanished, leading to a stagnation in property prices.
Today's market
Since 2013 Q3, most of the leading property markets in India have either stabilized or have corrected by 10-30% depending on the region. As inflation too refused to go down in 2013 & 2014, the interest rates were held high, which was not in favor of home buyers. The new government's initiative to curb down black money has also played its hand in the softening of the real estate segment in 2014 & 2015. But the core issue is that new jobs are not being created in core sectors. Any new job created by the e-commerce boom too does not pay enough to stimulate property demand.
What returns should I expect from Property?
Given this situation, we need to assimilate the fact that the magical returns of the last decade is a one time phenomena - which is nothing but a bubble in the property market. On the other hand, a boom and correction typically offers opportunity for people to invest/exit and make realty an affordable investable asset. It is only reasonable to expect Indian realty to provide a 10-12% return p.a (capital appreciation + rental yield). Compare this with Fixed deposit offering a 8-9% p.a and Mutual Funds with a 12-15% return p.a.
The Boom Years
From 2007 to 2013, property prices escalated so high that people were shunning all other forms of investment and going full steam on property. Although GDP growth was cited as a reason for the boom, the primary driver behind the maddening realty price was the QE (Quantitative Easing) carried out by the US Federal bank from 2009 to 2013. When QE eventually slowed from 2013, easy money vanished, leading to a stagnation in property prices.
Today's market
Since 2013 Q3, most of the leading property markets in India have either stabilized or have corrected by 10-30% depending on the region. As inflation too refused to go down in 2013 & 2014, the interest rates were held high, which was not in favor of home buyers. The new government's initiative to curb down black money has also played its hand in the softening of the real estate segment in 2014 & 2015. But the core issue is that new jobs are not being created in core sectors. Any new job created by the e-commerce boom too does not pay enough to stimulate property demand.
What returns should I expect from Property?
Given this situation, we need to assimilate the fact that the magical returns of the last decade is a one time phenomena - which is nothing but a bubble in the property market. On the other hand, a boom and correction typically offers opportunity for people to invest/exit and make realty an affordable investable asset. It is only reasonable to expect Indian realty to provide a 10-12% return p.a (capital appreciation + rental yield). Compare this with Fixed deposit offering a 8-9% p.a and Mutual Funds with a 12-15% return p.a.
So, setting aside the 25% p.a returns of yesteryears, you need to analyze how the property asset will perform in your portfolio alongside other assets:
- Am I able to pay the EMI with the rental (is the property self-sustaining)?
- If the cost of borrowing is way above the rental yield, should I consider selling it?
- Is it a good time to sell the property and invest in other financial assets?
- If the price is not increasing much, should I buy one more property?
- I had invested in the property to bequeath the asset to my children, so should I not worry about the current market?
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