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Saturday, May 11, 2013

Real estate in India is not a great asset class

Most people in India are convinced that investing in real estate is a great idea. In the Economic Times today, I have an article titled Real estate in India is not a great asset class.

Economic Times had carried this as a `poke me' feature, where reader comments are invited. There are 186 comments there as I write this, and they are broadly hostile to what I have written. I would get nervous about the price of any asset where a strong majority of market participants think there are great returns in store.


  1. Well said sir. How can an asset that earns an income yield of 2-3% (and hardly growing at par with inflation), i.e. real estate, sustain high returns over a long term.

  2. R Jagannathan, author at Firstpost, was saying the same thing in different words:

  3. I read your article on the real estate with great interest since in last 20 years of my service with the Government ,I didn’t invest a single rupee in Real Estate. But now with little retirement benefit at hand recently, I am considering this as an option. However, I have the following points to make:.
    1. My idea of a RE investment in India (purely from investment point of view) is to invest in a piece of land / plot, rather than a flat or house. For, one has greater flexibility and at times better liquidity in transacting on land rather than flat. Similarly, while the flat / house is subject to depreciation (at least physically) and may lose value after a decade or so, the piece of land would not.
    2. Concentrate on B+ / B or C+ grade cities that are yet to grow. Cities like Indore, Bhopal, Ranchi, Bhubneswar etc. where the progress is yet to take place and hence saturation is at least a few years away should be considered as option for investment. However, if one doesn’t live there of doesn’t have roots at such location there the risk is very high. Risk of frauds, title, registration, encroachments, run by night developers, caretaker etc. does exist in cities lesser known to us. However, if the same is offered through well established and reputed townships offering clear titles with security and maintenance etc., its still worth a shot. Cities having potential of development such as cities covered under the JNNURM, future Metro and other infrastructure should also be considered important variables for decision making.
    3. To begin with, and specially for a novice I would advise that Instead of putting all eggs in one basket, if one can diversify the risk by investing in higher number of unit transactions with lesser amount per unit it would allow a medium term consolidation. For example, one can consider investing just half a million each in five smaller plots, away from town that is sold at discount and then wait and watch for say five years or so. During this period the plots are being developed by the township themselves and there is pressure on land to move on the outskirts. Now the moment there is infrastructure and other development, the prices are bound to shoot up with greater demand shifting from main township to the outskirts. That’s the time that once can consider liquidating all five units and create a bigger larger asset. This is very similar for a novice to start investing through a mutual fund root and then switch over to direct equities.
    4. What we badly need in India is an RE Regulator and Credit Rating. Not sure if the RE regulator could be a strong / week one since the vested interests of politicians and bureaucracy would certainly impact the same, but an independent credit rating agency could be useful for the prospective buyer and seller. While the regulator would not control the prices, but it could at least ensure that the promises made by the realtors are fulfilled and that non fulfillment would allow them to take legal action. Many realtors promise that they would deliver the flat in X years / Months, but finally the same gets delivered in X + years. The regulator could at least put pressure on them to ensure timely delivery so that the cost and time overruns are not borne by innocent investors.

    As mentioned at the outset, I am neither a practitioner nor an expert in the RE area and would appreciate if you could provide your reactions over my ideas mentioned above.

  4. Terrible Experience with Indian Real Estate Forum (Housing Fraud)


    The much talked about RERA Act which is scheduled to be implemented by the first quarter of 2017 has received its draft finalizations from the Maharashtra Government. RERA is aimed to bring about more transparency in the real estate sector. The current draft puts light on the ambiguous point of dividable and non-dividable land for conveyance transfer. Apart from this the act would also make it mandate to disclose project levels. The government has asked for suggestions and objections by December 23. Post reviewing the same the Maharashtra Government would re-submit draft or go ahead with the final rules. RERA would only affect fly by night developers.


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