The only other asset class that could have matched real estate in terms of returns is Indian stocks.
Share prices of quite a few bluechip companies have grown at 18-30% per annum over the last 20 years. Wipro (36%), Berger Paints (28.5%), Apollo Hospitals (23%), Coromandel International (23%), Asian Paints (22%) and HDFC (20.7%) have grown in excess of 20% pa since 2003. There are others like ITC (19.7%), Bosch (19.1%), Glaxosmithkline Consumer (18.6%), Mahindra & Mahindra (18.0%) and Nestle India (18.5%) that saw their share prices grow at 18-20% pa in the same period.
However, after almost a decade of a secular rise, property prices seem to be taking a breather, affected though to a lesser extent by slowing growth, rising costs, higher interest rates and tighter funding norms. Liquidity seems to be drying up, volumes are declining and prices are said to have corrected by 10-15% from their recent peaks at some of the hottest property destinations. Does that mean the real estate story is over for some time The answer is both a yes and no.
Property markets are more localised than most people think. A fall in prices of real estate in Mumbai or Bangalore does not necessarily mean a fall in price in other markets too. Demand for real estate is more price-elastic than interest-rate-elastic. Demand will come at the right price. Value will continue to lurk in some pockets.
But areas that have seen an exponential rise in property prices must undergo some correction. For instance, despite the anticipated gloom, a residential property available at R4,000 per sq ft or less in the NCR region today seems a good value buy for the medium to long term. Since property markets are at different stages of growth in different cities, one must explore investment opportunities in other parts of the country as well.
Just like every stock does not turn out to be a multi-bagger, in the same manner, every property one buys does not turn out to be a goldmine, unless we are in those reflationary periods fuelled by ultra-cheap money (2005-2007 and 2009-2010) when most properties gave phenomenal returns. An investor needs to be both selective and cautious.
The current weakness, if it persists for some more time, will make real estate a buyers market. Land owners are getting desperate after an almost 2-3-year-long stagnation, and with over-leveraged developers unable to oblige them, land, that was a scarce resource until now, may get cheaper and increasingly available. This should bring down costs of development and make properties more affordable in future. Shrewd investors will be looking to make a killing.
Picking the right property in this market is like picking the right stock in a volatile market. It needs in-depth research, high conviction and loads of patience and perseverance. One needs to have the right instinct before investing in a particular property.
People tend to ignore liquidity risks in real estate and end up over investing. If one owns an expensive property today, one should exercise caution by not linking all his/her financial goals with it, as there is no surety of the property getting sold quickly, especially in case of a slowdown, where your investment might take longer time to deliver.
It is important to have sufficient liquidity in ones portfolio. Diversify across asset classes such as debt, equity, gold and also across products such as mutual funds, insurance and fixed deposits. In my view, property should not constitute more than 50% of your investment portfolio simply because of the illiquidity factor attached to it. To conclude, one must be careful before falling in love with real estate, except the place where you are actually residing. Other properties should be looked at clinically.
The author is vice-chairman & managing director, Bajaj Capital. Views expressed are personal