Real estate in India is not a great asset class
Real estate in India is not a great asset class

Most people in India are convinced that real estate is a great asset. More caution is in order. Real estate investment is not a guarantee of profit. It is hard to be diversified, and illiquidity hampers portfolio structuring. Most important, the outlook for supply over the medium term implies that there is no great upside.


Too many intelligent people in India believe that one can never do wrong by investing in real estate. Some facts will help bring more sense. Consider investing in the best commercial real estate of Bombay -- Nariman Point -- in 1995. The price was Rs.35,000 per square foot. Today, almost 20 years later, the price is Rs.25,000 a square foot.


Over this period, Nifty produced returns of 362%. Inflation ate away 272%. Net of inflation, Nifty delivered an average annual return of 1% while Nariman Point commercial real estate delivered -9%. I have ignored rental yield on real estate and dividend yield on equity.


This is, of course, just an anecdote. Many individual real estate investments have done very well and have occasionally outperformed equities. My point is a limited one. We should not mindlessly assume that real estate is always a good investment. We should not assume that real estate will always outperform equities -- as the above example shows things can be as bad as underperformance (compared with the Nifty index fund) of 10 percentage points per year over a 19 year period.


Why did Nariman Point underperform over this period? Because of new supply. That is the heart of the problem of real estate as an asset class. There is no long term returns in owning steel or bricks. Every time there is a real estate boom, it triggers off fresh construction. This supply quenches the boom.


Bombay is a pretty bad place in terms of availability of space, because of both geography and governance. Elsewhere in India, the case against real estate is even stronger. The government in India is slow to build roads and water supply and police stations in outlying areas. But with a lag, these facilities do come about. Ultimately, when the price of structures exceeds the price of bricks and steel, new supply emerges, which is bad for real estate prices. The rise of a professional real estate industry, coupled with access to formal finance including foreign capital, has increased the scale of supply and given bigger and faster corrections.

Some claim that India has a large population and there is a shortage of land. A little arithmetic shows this is not the case. If you place 1.2 billion people in four-person homes of 1000 square feet each, and two workers of the family into office/factory space of 400 square feet, this requires roughly 1% of India's land area assuming an FSI of 1. There is absolutely no shortage of land to house the great Indian population.

The biggest story about the future of real estate prices in India is the `floor space index', FSI, or rules that restrain building into the sky. In most of India, the FSI is below 2. This is an abysmally small number by global standards. All over Asia, FSIs are above 5, going up to 20 or to no limit. In the long run, politicians in India will see the light and FSI will rise. A higher FSI results in lower rental rates for households and firms, as was seen in Hyderabad which was a pioneer in FSI reform. When FSI goes up, this will unleash supply on a big scale. As an example, if Bombay moves from an FSI of 1 to 2 -- which would still make it worse than the FSI seen anywhere else in Asia -- this would trigger off a doubling of supply.


These arguments are not specific to India. While datasets about real estate investments over long time periods are not easy to come by, academic evidence is slowly building up of fairly poor returns to real estate. Net of inflation, real estate tends to produce roughly 0 over long periods, while equity indexes produce significant and positive returns after inflation.
Finally there are the practical difficulties of diversification and liquidity. Most people are not rich enough to buy 50 properties spread across India. Buying and selling involves very large transactions costs and delays, and generally involves black money.
Skepticism is in order. If less than 1% of the land area of India is built out, this is enough for the entire population. There is no long-run return in hoarding bricks and steel. Real estate booms the world over are quenched by supply. The prospect of holding real esate in India is worse because FSIs are tiny. In the future, FSIs will go up, which will further fuel supply. Households investing in real estate are also hurting on account of inadequate diversification, illiquidity and the use of cash.
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  • दिल बहलाने के लिये खयाल बडा अच्छा है गालिब !!
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  • nariman point is hitting around 70K psf...
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  • RE asset class

    Originally Posted by mankind
    Real estate in India is not a great asset class
    Real estate in India is not a great asset class

    Most people in India are convinced that real estate is a great asset. More caution is in order. Real estate investment is not a guarantee of profit. It is hard to be diversified, and illiquidity hampers portfolio structuring. Most important, the outlook for supply over the medium term implies that there is no great upside.


    Too many intelligent people in India believe that one can never do wrong by investing in real estate. Some facts will help bring more sense. Consider investing in the best commercial real estate of Bombay -- Nariman Point -- in 1995. The price was Rs.35,000 per square foot. Today, almost 20 years later, the price is Rs.25,000 a square foot.


    Over this period, Nifty produced returns of 362%. Inflation ate away 272%. Net of inflation, Nifty delivered an average annual return of 1% while Nariman Point commercial real estate delivered -9%. I have ignored rental yield on real estate and dividend yield on equity.


    This is, of course, just an anecdote. Many individual real estate investments have done very well and have occasionally outperformed equities. My point is a limited one. We should not mindlessly assume that real estate is always a good investment. We should not assume that real estate will always outperform equities -- as the above example shows things can be as bad as underperformance (compared with the Nifty index fund) of 10 percentage points per year over a 19 year period.


    Why did Nariman Point underperform over this period? Because of new supply. That is the heart of the problem of real estate as an asset class. There is no long term returns in owning steel or bricks. Every time there is a real estate boom, it triggers off fresh construction. This supply quenches the boom.


    Bombay is a pretty bad place in terms of availability of space, because of both geography and governance. Elsewhere in India, the case against real estate is even stronger. The government in India is slow to build roads and water supply and police stations in outlying areas. But with a lag, these facilities do come about. Ultimately, when the price of structures exceeds the price of bricks and steel, new supply emerges, which is bad for real estate prices. The rise of a professional real estate industry, coupled with access to formal finance including foreign capital, has increased the scale of supply and given bigger and faster corrections.

    Some claim that India has a large population and there is a shortage of land. A little arithmetic shows this is not the case. If you place 1.2 billion people in four-person homes of 1000 square feet each, and two workers of the family into office/factory space of 400 square feet, this requires roughly 1% of India's land area assuming an FSI of 1. There is absolutely no shortage of land to house the great Indian population.

    The biggest story about the future of real estate prices in India is the `floor space index', FSI, or rules that restrain building into the sky. In most of India, the FSI is below 2. This is an abysmally small number by global standards. All over Asia, FSIs are above 5, going up to 20 or to no limit. In the long run, politicians in India will see the light and FSI will rise. A higher FSI results in lower rental rates for households and firms, as was seen in Hyderabad which was a pioneer in FSI reform. When FSI goes up, this will unleash supply on a big scale. As an example, if Bombay moves from an FSI of 1 to 2 -- which would still make it worse than the FSI seen anywhere else in Asia -- this would trigger off a doubling of supply.


    These arguments are not specific to India. While datasets about real estate investments over long time periods are not easy to come by, academic evidence is slowly building up of fairly poor returns to real estate. Net of inflation, real estate tends to produce roughly 0 over long periods, while equity indexes produce significant and positive returns after inflation.
    Finally there are the practical difficulties of diversification and liquidity. Most people are not rich enough to buy 50 properties spread across India. Buying and selling involves very large transactions costs and delays, and generally involves black money.
    Skepticism is in order. If less than 1% of the land area of India is built out, this is enough for the entire population. There is no long-run return in hoarding bricks and steel. Real estate booms the world over are quenched by supply. The prospect of holding real esate in India is worse because FSIs are tiny. In the future, FSIs will go up, which will further fuel supply. Households investing in real estate are also hurting on account of inadequate diversification, illiquidity and the use of cash.

    Well if someone does not believe in RE as an asset class,he can avoid investing there.Every asset class has a time when things do well.invest at the right time and exit when you feel you have achieved your target.
    Personally I believe in Real estate: these quotes reflect my philosophy toward RE at this point in time:
    "It's tangible, it's solid, it's beautiful. It's artistic, from my standpoint, and I just love real estate."
    Donald trump

    "Now, one thing I tell everyone is learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values and the least risk."
    Williams Armstrong
    These kind of theories about RE keep coming up,but time has proved the solidity of RE as an asset class.
    CommentQuote
  • Why Mumbai real estate rates will continue to be stable

    In the Indian city which has for years carried the unwholesome reputation of being the most over-priced in terms of residential real estate valuations, there is no relief in sight for aspiring home buyers. Over the last four years, property valuations in the financial capital have increased by an average of 66 percent. All ‘expert’ predictions of an imminent correction over the last three years have proved to be wrong.
    It is true that going by all known market dynamics, a correction was inevitable. Lack of affordability over an extended period is a known catalyst for downward revisions in any market category, including real estate.
    Another globally accepted precursor of a property market correction is a surfeit of unsold inventory. If these two indicators would have held true in Mumbai, the city’s residential real estate market should have corrected three years ago. However…
    Ground Reality
    Residential property prices in Mumbai have increased steadily after the correction seen post the Lehman debacle. In the period from the second quarter of 2009 to the same quarter in 2013, residential real estate prices in Mumbai have increased by 66 percent. In Thane, the increase has been even higher at 70 percent while Navi Mumbai has seen a staggering escalation of 74 percent.
    Even within Mumbai, some locations have crossed the 66 percent average increase in the same period. The Malad–Borivali belt has seen an increase of 85 percent. The cumulative price escalation figures for Mumbai, Thane and Navi Mumbai represent the highest among all cities in India. During the period in question (2Q 2009-2Q 2013), Gurgaon and Bangalore – undeniably two of the hottest real estate markets in India – saw increases of 52 percent and 46 percent, respectively.
    From an end-user’s perspective, Mumbai’s astronomical residential price increase is undoubtedly irrational. Below the surface, however, there are market forces at work which cannot be mitigated.
    Escalation triggers
    One of the primary reasons for Mumbai’s ‘unreal’ price movements is the limited supply of ‘clear’ land. Other factors at play are the reduction in new launches over a 1.5 year period from 1Q 2011 to 2Q 2012, caused largely by a slowdown in approvals for new projects, and the high interest rate scenario in 2010-2011. In this period, the government, in its efforts to curb inflation, raised lending rates around 12 times.
    Every time this happened, developers’ input costs for their projects rose in tandem. The matter was further compounded by the pressure on developers to give assured return to investors who had bought into their projects at the pre-launch stage.
    Meanwhile, there was a high rate of price volatility in other asset classes such as equity. This, along with the high cost of debt, brought about a massive liquidity crunch. As a result, developers’ backs were to the wall when it came to purchasing the massively priced land parcels. This limited new project launches. The historical title disputes attached to many of these plots did not help matters much, either.
    In the midst of all this came the new development control rules, which caused many projects to come to a grinding halt midway as developers and architects struggled to adapt projects at various stages of development to a completely new set of mandatory guidelines.
    Finally, we need to consider the phenomenon that is, in degree if not in principle, more or less unique to Mumbai – that of developers as well as buyers adopting the dubious philosophy of benchmarking prices in an particular locality based on one or two high-profile transactions or over-hyped launches.
    Demand remains steady
    Through it all, the demand for investment residential properties and end-user homes in the country’s financial capital has remained stable. The ever-increasing number of second home buyers within the city and the firmly entrenched – and admittedly vindicated – mind-set that real estate prices in Mumbai will never go down will ensure that the stability of Mumbai residential real estate market will continue.
    http://www.firstpost.com/blogs/why-mumbai-real-estate-rates-will-continue-to-be-stable-777741.html?utm_source=voices&utm_medium=hp
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  • Originally Posted by vaibav123
    Well if someone does not believe in RE as an asset class,he can avoid investing there.Every asset class has a time when things do well.invest at the right time and exit when you feel you have achieved your target.
    Personally I believe in Real estate: these quotes reflect my philosophy toward RE at this point in time:
    "It's tangible, it's solid, it's beautiful. It's artistic, from my standpoint, and I just love real estate."
    Donald trump

    "Now, one thing I tell everyone is learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values and the least risk."
    Williams Armstrong
    These kind of theories about RE keep coming up,but time has proved the solidity of RE as an asset class.

    Japan is a much smaller country with a high density of population. Three decades ago, during the real estate mania, the land around imperial palace alone was valued more than all the lands put together in California. As always, the bubble burst.
    CommentQuote
  • One more good thread having discussion on RE.


    Fallacy is that if one does not think RE is a great asset, why would he then even be visiting a forum having a RE genre.


    One can post such things on some Stocks , Mutual Fund forum spewing words over the rival asset class.
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