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Equity investing is more reliable than investing in real estate

by Money Puzzle   ·  May 29, 2024   ·  

In a growing economy like India, there are bound to be innumerable stories about how individuals have gained multiple times the value of their investment in real estate. Truth be told, in the last 20 years or two decades, there has been one boom cycle that real estate as an asset saw across the board – which was back in 2003-04 till 2008.

That was a period when one could blindly buy residential real estate and the investment had the potential to treble in a matter of a 2-3 years. There was a lot of flipping of properties ie. buying and selling in quick succession and many middle-class investors were able to use leverage from banks to make outsized returns in real estate.

In Mumbai, the lows of 2003-04 still haunt those of us who missed the bus. That boom cycle, hasn’t repeated itself in the widespread manner that we witnessed previously. It did, however, create a false sense of assured gains from real estate investing, which, haven’t quite played out in the last decade.

In fact, the last 10-12 years in the real estate cycle, have been marked by poor quality and delayed delivery of residential real estate, at least that’s the case in major metro cities in India. Even so, the legacy of the asset and the emotional ties we carry for owning a home, have ensured that demand for buying remains robust.

What about investing in equity? Undoubtedly, the last two decades has seen a big pull for investors into equities through direct stocks and through managed funds like mutual funds. The sentiment however, is still skewed towards thinking of equity has a quick return asset that can grow your kitty in a few years.

Equity is a long-term asset, just like real estate. Having said that, individuals who are willing to on hold on to their real estate investments despite delays and market downturns, aren’t as forgiving when it comes to equity assets. Perhaps because the interim fall in returns during corrections is far more visible in case of equity.

When it comes to returns, empirical analysis of long-term performance over the last 3 decades in these two assets has shown that holding equity assets for decades is a more profitable proposition that real estate and it’s also not as costly an affair.

Which way to go? A checklist to apply

Let’s talk about the practical aspects of investing in either real estate or equity.

The areas where equity scores above real estate are:

  • Transparency – All details of the investment are available to you at all times. You can compare gains and losses against similar portfolios and other stocks. This is not the case with real estate where pricing is a negotiated affair between two parties. It’s common to see two neighboring apartments or residential houses being sold at different prices during the same period of time. The reason for this difference could be the condition of the house or simply the negotiating power of the buyer. In case of equity shares or mutual funds, there is negligible arbitrage if two people buy the same stock at the same time. This happens thanks to the standardized processes of stock exchanges.
  • Flexibility – Equity investments can be bought and sold with a click of the button. Once sold you get your money in the bank within 2 days. This flexibility of moving in and out of equity with agility is missing in real estate thanks to the documentation, registration and other aspects. Usually, a sale can take a month or a few months to be concluded with a lot of paperwork in between.
  • Managed funds – In any asset the quality of what you are buying matters. A poor-quality stock is unlikely to give you inflation beating returns in the long term as is a poor-quality real estate purchase. But not every individual who needs to invest in long term assets will be able to sift through the choice available and pick good quality. In case of equity shares, managed funds like mutual funds, PMS and AIFs bridge this gap with the help of professional fund managers and pool assets of investors. In real estate this is missing. In all fairness, there are real estate linked alternate investment funds, but the track record there over the last 15-20 years has not been good. The unevenness of the real estate market tends to play spoil sport.
    Moreover, the number of factors you need to consider for a single real estate investment are too many and the impact can only be known in the future. If any of the factors turn negative and you want to sell, it’s not easy for individuals to do. This aspect is managed well in equity thanks to stock exchanges, you can quickly sell a share that you no longer have faith in.
  • Small ticket size – The other flexibility offered by equity is that you can invest in small amounts, Rs 500-1000 at a time. This is not possible for real estate. This feature of equity makes this asset very useful for the beginner who wants to start accumulating and creating wealth.
  • Additional costs – Other than brokerages and demat charges which, as quite a small proportion of trade value, there is no cost in investing in equity. In case of real estate, there are registration costs, maintenance, eventual repairs, utility costs and so on. If you are not staying in the property and it’s meant as an investment, these costs take away from the nominal return.
  • Succession – An important distinction in the two assets is the effort required during transition from one holder to another. In case of equity assets, the task is easier provided there is a nominee mentioned. Filling of one form with signatures and details during nomination and another during the transition of assets upon the demise of the primary holder, does the trick. In case of real estate, the changeover necessarily requires probating of the will and a court appearance for change of ownership. God forbid there is no will, the task of passing on property to the next of kin becomes a long drawn out process.

Despite the benefits, there are caveats in equity investing which don’t help when you compare against real estate.

  • Too many distractions – When we talking about investing in equity, we are talking about buying and holding for at least 8-10 years or more. However, you can trade in shares and you can trade in futures and options, these are all very distracting as they lure investors with the greed of quick profits. Real estate on the other hand is assumed as a buy and hold asset, it’s rare to see that one will sell in one location and buy in the other overnight. In this respect, the lack of transparency in real estate becomes a boon as you have only word of mouth profits to compare with others and no published exchange-based profits that can entice you to shift or trade too often.
  • Roof over your head – All said and done, there is a certain level of security that a roof over your head provides. Even if you don’t live in the real estate you have invested in, you know that if everything crashes in the economy and you are unable to generate income at the same level and stock markets have crashed, you have a place to stay. It’s a great sense of security to know that you won’t be on the streets even if the worst-case scenario plays out.
  • Emotional pride in owning a house – Let’s not kid ourselves, equity has a long way to go in overtaking real estate when it comes to instilling a sense of pride and fulfillment. Owning property makes your chest swell a lot more than having a winning portfolio of stocks.
  • Choice of plenty – There are more than 6000 stocks and a few hundred managed funds to choose from. You don’t need to diversify across more than 20-30 stocks or 2-3 funds; the task of choosing is a hard one. In case of real estate, you are likely to pick an investment in a micro market or area well known to you and in that stretch 4-5 developers may be there with under construction offers, making the choice a lot narrower and hence, easier.

In both equity and real estate, along with capital gains you earn through dividends and rental respectively. However, the yield for both is low at 2.5%-3.5% on average and this is not the carrot to make that investment. What both assets do well is compound your return over long periods of time.

Be sure that you measure this return well. A doubling of your real estate value in 10 years is barely a 7.2% annualized return. Whereas, in case of domestic equity, the expectation based on historical returns is closer to 10%-12% in this period. The other risk with real estate is that even in the same area or a radius of say a kilometer, two different projects can fare very differently when it comes to price rise; there are a whole lot of softer, hard to measure factors in play which can determine demand or the lack of it or the price that people negotiate to pay. Buying real estate remains a very personal choice and what one individual prefers may not work for another. Equity investing is a bit more objective than that, good quality earnings from a company and a reasonably valued share price, make it a compelling buy for every investor.

Now that you understand these nuances, it’s an easier choice to make for long term investing; for the regular individual investor the more practical and objective asset is equity and not the chunky investment in real estate.

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