In the recent time the recession in the real estate sector has become one of the most interested topic among the researchers. According to market experts the bubble in the real estate sector has burst. The prices of the real estate has decreased rapidly. Similarly the gap between the supply and demand has increased significantly in recent times (KPMG, 2014).
However, on the other hand the statistics show a different picture altogether. According to KPMG, India has the potential to become one of the leading destinations in the real estate sector. This is not just a hypothetical assumption but based on facts. The total value of the real estate sector in India is expected to increase to $676 billion by the end of 2025 (pwc, 2014).
Other than real estate sector there are various other investment opportunities available. In this article the investment and their return on other assets such as equity, term deposits and gold has been compared with the investment in real estate sector. The comparison is based on the returns on these assets over the period of time and future growth opportunities.
Volatile return in equity versus the stable return in the real estate sector
When it comes to investment the only thing the investor is concerned is the return from his assets. An investment is profitable if the return on the investment is higher than the cost of the investment. In India most of the investors invest either in the real estate or in equity. In the recent time it has been seen that the returns on the real estate is lower as compared to the return on equity. However this is only the short term phenomenon.
In long term investments the real estate sector has been offering higher returns in India. In the last two decades the average return from the real estate was 20%. On the other hand the average return on equity for the same time period was 15.5 % (CIANS Analytics, 2014).
Apart from higher returns, the real estate sector also provides more stable returns as compared to equity. As shown in the above figure, annual return on Nifty is highly volatile. Even though both real estate and the equity market is affected by the macro-economic environment of the country. However, the equity market response is much faster than the real estate. Looking at the current global economic situation, where most of the developed nations have not fully recovered from the crisis of 2007-08. Investment in the equity market may give lower returns, or negative returns. Thus, for the risk averse investor real estate can provide both stability and return (The Economic Times, 2014). Consequently, the housing prices in India have declined in the past few years. However, with increasing population and rural-urban migration the housing prices are ever rising.
Declining return on term deposits
Apart from equity and real estate another popular form of investment is the term deposits or the fixed deposits (FD). In such cases, an investor deposits money with the bank for a specified time period. In return the investor is subject to a specified amount of interest on maturity.
For most of the investors in India term deposit is one of the safest investment. However the returns on such deposits has been declining. As the above figure shows the average interest rate on term deposits was near to 12% in 1991 which has declined to less than 8% in 2016 (Handbook of Statistics : RBI, 2016). With increasing level of inflation and declining interest rate, the real return on term deposits is low.
For example, in a case where the rate of interest on a term deposit is 8% and the inflation rate is 7% (at the time of maturity), the real rate of return is 1%. In worse case if the inflation exceeds the rate of interest, then there is a negative return.
On the other hand the average return on the real estate sector has been increasing over a period of time. Even though the real estate sector is not offering high return, as compared to earlier years, the sector is expected to grow rapidly in future.
Increasing prices and declining return on Gold
There is a general consensus among the population of India that since the price of gold is increasing every year, it is profitable to invest in gold. Among the two proposition only one of them is true i.e the price of gold has increased continuously.
However, the return from gold has declined in the recent years. For the last three years the returns are negative. To make the Gold investment more attractive the Government of India introduced the Gold Monetization scheme in 2015. However the return on such scheme range from 2.25% to 2.50% per year (Bloomberg, 2015).
Right time to invest in the real estate sector
The above figure shows that in the last five years there has been significant volatility in the returns of cash, gold, debt and equity. Return on gold and return on equity, which are the most common investments is in negative. In this scenario the real estate sector emerges as the most attractive investment for the long term. There are various reasons which makes the investment in real estate sector more attractive and shows great potential to grow.
Despite the economic recession around the world, India has shown impressive growth and recently it has surpassed China as the fastest growing major economy (The Telegraph, 2016). With increase in the economic growth the per capita income has also increased. With increasing population and rising income, demand for housing is certainly on the rise.
Advantage of lower interest rate
The Reserve Bank of India has reduced the interest rate by 150 basis point since 2015 (one basis point is the 100th of a percentage point) (The Economic Times, 2016). Reduction in the interest rate have dual effect, both of which can lead to higher investments in real estate sector. Firstly, the decline in interest rate means lower interest rate on the savings. This means decline in return on savings and term deposits makes real estate more attractive option for investment.
Secondly, lower interest rate means availability of cheaper loans from the bank. However investments in equity market is possible with personal loans, which is not a rational decision for a risk averse investor. Consequently, banks provide home loan at a much lower rate of interest in compared to personal loans.
Thus, on the basis of the analysis on various investment options and their current and past record of returns, it would not be wrong to say that investment in real estate sector is an appropriate option. Various government initiatives such as the introduction of Real Estate Regulation Act (RERA), Real estate Investment Trust (REIT) and Smart cities project are expected to revive the real estate sector.
- Bloomberg. (2015). Precious and Industrial Metals. http://doi.org/http://www.bloomberg.com/markets/commodities/futures/metals
- CIANS Analytics. (2014). REITs in India. Retrieved from http://ciansanalytics.com/white-papers/
- Confedaration of Indian Industry. (2015). Emerging investment hotspots. New Delhi.
- Cushman & Wakefield. (2016). OPPORTUNITIES FOR FOREIGN INVESTORS IN INDIAN REAL ESTATE. New Delhi. Retrieved from http://www.cushmanwakefield.com/~/media/reports/india/Anrev%20Report.pdf
- Gupta, R., & Dhawan, S. (2012). Real Estate in Gurgaon: Opportunity and Challenges. International Journal of Management & Business Studies, 2(4).
- Handbook of Statistics : RBI. (2016). Structure of Interst rate. Mumbai.
- Kennon, J. (2016, August 22). Real Estate vs. Stocks – Which Is the Better Investment? The Balance. Mumbai. Retrieved from https://www.thebalance.com/making-money-from-real-estate-investing-357984
- KPMG. (2014). Indian real estate -opening doors. New Delhi.
- KPMG. (2016). Real Estate (Regulation and Development) Bill. New Delhi. Retrieved from https://www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPublications/Documents/Real-Estate-(Regulation-and-development) Bill, March 2016.pdf
- Krishnan, A. (2015). Why Equity Funds Don’t Beat Real Estate. Value Research. Mumbai. Retrieved from http://www.valueresearchonline.com/story/28513
- National Housing Bank. (2015). Annual Report of National Housing Bank. Mumbai. Retrieved from http://www.nhb.org.in/Publications/Annual-Report-2014-15_ENG.pdf
- NSE India. (2016). Return on Nifty. Retrieved September 26, 2016, from https://www.nseindia.com/products/content/equities/indices/indices.htm
- pwc. (2014). Real Estate 2020 Building the future. Mumbai. Retrieved from https://www.pwc.com/sg/en/real-estate/assets/pwc-real-estate-2020-building-the-future.pdf
- The Economic Times. (2014, July 25). Real estate, equities give maximum returns in past 2 decades: Study. The Economic Times. New Delhi. Retrieved from http://articles.economictimes.indiatimes.com/2014-07-25/news/52026608_1_real-estate-equities-various-asset-classes
- The Economic Times. (2016, August 31). Since January 2015, RBI has cut rates by 150bps. The Economic Times. Mumbai. Retrieved from http://economictimes.indiatimes.com/wealth/personal-finance-news/since-january-2015-rbi-has-cut-rates-by-150-bps-heres-how-little-has-reached-you/articleshow/53942800.cms
- The Telegraph. (2016, February 8). Growth star India overtakes China as world’s fastest growing major economy. The Telegraph. Retrieved from http://www.telegraph.co.uk/finance/economics/12146579/India-overtakes-China-as-worlds-fastest-growing-major-economy.html
Latest posts by Indra Giri (see all)
- Format your article before you submit it to Knowledge Tank - March 17, 2017
- Interpreting multivariate analysis with more than one dependent variable - March 14, 2017
- Multivariate analysis with more than on one dependent variable - March 14, 2017