People are obsessed with Real Estate and believe it is the best investment. Cool, read on to get some nasty surprises.
My job as a investment consultant is to help you achieve your long and short term goals comfortably. Real estate and Equity both are growth oriented and volatile asset classes but still Real estate especially in India is more risky to invest in and generally financial planners find it difficult to map real estate with goals. I have gathered some thoughts below to justify the flaws in real estate as an asset class:
1. Lack of Transparency: Real estate is one sector where you can’t get all the information on a single website or in a single document. Moreover there are many hidden/unclear things in a project which makes the deal more risky. Information about promoters’ background, past project delivery experience, status of land, statutory approvals is not available.
2. High Transaction Cost: Costs like transaction, stamp duty, brokerage etc…ranges from 6% – 11% depending on the state where the property lies in. If you are constructing your property then you also will have to bear the inflation cost which will hit the construction material, architect fees, contractor charges and also fees towards taking various approvals like for electricity connection, water connection etc.
3. Taxability: Any gain in real estate is taxable. Though tax rates vary for short term and long term and investor will also get indexation benefit for long term transaction but still he has to pay 20% tax on Indexed gains which reduces the overall net returns of real estate.
4. Menace of Black Income: High Transaction cost and Taxability both has led to increase in tax evasion with the parties involved understating the property sale and purchase prices. In many cases even buyer wants to pay in cash so registration cost should be at the minimum required by law.
5. Lack of Liquidity: Real estate can’t be sold on a click of mouse. Many times you don’t find a buyer, even if you want to sell below the purchase price i.e in loss. If the property has been mapped with a goal then in this situation complete financial planning can go for a toss.
6. No partial liquidity: You cannot sell your real estate partially like a room of a flat or some portion of your built up property. You may find yourself in a big financial soup if you have not planned your cash flow properly and also are over invested in real estate. You cannot liquidate a property of 1 crore if your need is only 10 lakhs.
7. High maintenance cost: You have to pay price for keeping the property in resaleable state. Even if you don’t live in it or don’t give it on rent, you still have to pay cost for maintaining that property in the form of society charges, minimum electricity charges, renovation charges, improvement charges etc.
8. Poor rental Yield: Placing property on rental and earn regular income is one of the main reasons of buying property by many. Many people give it as excuse that they will not lose money on maintenance cost as they will keep property on rent and see the capital value growing. But mathematically people lose on this front too. Rental yield especially in residential property in India is very low. Its hardly between 1%-3% and that too is taxable. My savings a/c earns me more than this.
9. Informal market: Unlike other asset classes like equity, gold and debt; real estate does not have any ready market available where people sell or purchase on real time basis. The process is long and that too starts only if buyer and seller are available and agreeing to the transaction. The price discovery mechanism is also very opaque in this sector. It may take years to sell the property.
10. No Regulator: Unlike SEBI, RBI, IRDA who regulate Capital Market, Banking and Insurance Sectors respectively; real estate sector does not have any regulator. The plight of residents of Campa cola complex in Mumbai is also the result of having no regulator over builders and nexus between builders and corrupt politicians.
We hope that the Real Estate (Regulation and Development) Act will bring much needed transparency.
I really wonder why Real Estate is considered as safe and Equity as risky asset class in India. Equities are much transparent, cost and tax effective, properly regulated and liquid asset class. When investors expect trust, transparency and wise advise from Financial Planner, how can they expect a planner to advise on putting their hard earned money in such opaque sector. Real estate can surely give you a high sense of pride in ownership of a tangible asset but as an investment it has lot of flaws in it.
As warren buffet said “Risk comes from not knowing what you are doing”. If you think that even after understanding the risks you feel safe in real estate, then its purely your choice.
Happy Investing !