Real Estate remains the best ‘all weather’ asset class

As a stock-market investor, you have likely experienced a rollercoaster in the past few days. From record-high levels in early trade on Monday, just before the Lok Sabha election results, to the wipeout on Tuesday when investor wealth plummeted by Rs 14.27 lakh crore, and the prices of all stocks on the Bombay Stock Exchange took a nosedive – the stock markets have been a whirlwind of volatility in just three days.

Volatility in the stock markets is natural, and many investors choose other means to balance their portfolios. However, many options, like FDs are not always tax efficient and fail to beat even inflation while physical assets like Gold have other issues such as storage and security risks. As such, how does one build a balanced portfolio that ensures stability as well as growth?

A recent sentiment survey by research firm ANAROCK showed that over 57% of respondents preferred real estate as the best asset class for investment. The reason? despite global uncertainties, the real estate sector has remained resilient, offering not just inherent stability but also inflation beating returns to investors. Besides returns, real estate provides emotional security and tax savings. Moreover, it holds a special place in our hearts, so much so that even children prefer to draw homes as their first art pieces!

In the words of Franklin Roosevelt, “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”

This blog post explores various benefits of investing in real estate.

Stability and Tangibility

Real estate investment offers a unique combination of stability and tangibility, which provides a sense of security. Unlike stocks or mutual funds, which can be highly volatile and subject to market fluctuations, real estate offers a physical asset with intrinsic value. The land and property market, while not immune to economic cycles, does not experience the extreme fluctuations seen in other market-linked investment options. This stability, coupled with the tangible nature of the asset, is particularly appealing in uncertain economic times, offering a reassuring investment option that can bring a much-needed sense of stability and security.

Good Returns on Investment

Real estate is often associated with good returns over the long term. Historical data in India shows that property prices increase significantly over time, providing substantial capital appreciation. Economic development, rising incomes, and rapid urbanisation will keep the demand for real estate robust well into the future. India’s real estate market is predicted to be vibrant and profitable for many years. The ‘India Real Estate: Vision 2047’ report by Knight Frank forecasts that the sector is expected to expand to $5.8 trillion by 2047, contributing 15.5% to the GDP from an existing share of 7.3%. Even though there may be occasional swings, traditionally, real estate in India has increased steadily, making it an effective instrument for wealth building.

Growing cities such as Mumbai, Pune, Bangalore and Chennai will always see an upward push towards home ownership and with that will come substantial rental yields as well as capital appreciation. Real estate offers inherent end-use and this is a key differentiator.

Inflation Hedge

Real estate serves as an effective hedge against inflation. As inflation rises, property values and rental income typically increase, preserving the purchasing power of your investment. This contrasts with many financial instruments where returns may not keep pace with inflation, eroding real value over time. For Indian investors, whose inflation rates can be higher than in developed economies, real estate provides a safeguard for maintaining the value of their investments​.

Diversification

Investing in real estate allows for diversification of investment portfolios. Diversification is a critical strategy in managing risk, and having real estate in an investment portfolio reduces reliance on the stock market, lowering overall portfolio risk. Real estate often performs differently from stocks and bonds, adding a layer of stability to the investment mix​.

Regular Income through Rentals

Unlike stocks or gold, real estate provides the possibility for consistent rental income. A substantial source of passive income, this rental income can offer financial stability and may compensate for other costs like loan payments. This income can provide a steady cash flow, particularly beneficial for retirees or those looking to supplement their regular income. The rental yield in Indian cities currently varies between 2.80%-4.45%, with Bengaluru topping the chart at 4.45%, followed by Mumbai and Gurugram at ~4% in well maintained gated communities. With work-from-office catching pace, the trend is likely to continue.

Tax Benefits

Real estate investments offer the advantage of leverage, allowing investors to purchase property using borrowed funds. This means you can own and control a significant asset by paying a fraction of its value upfront, with the rest financed through a mortgage. Various tax benefits are currently associated with real estate investments in India, such as deductions on home loan interest and principal repayments, which can significantly reduce the overall tax burden.

Emotional and Social Security

Owning property provides a sense of emotional and social security that is unmatched by other investments. For many Indians, owning a home is a significant milestone and a source of pride and stability. It stands for security, accomplishment, and a legacy to be left to the next generations. This emotional factor and financial benefits make real estate a preferred investment choice for many families. Also, staying on rent indefinitely is not an option for many given the uncertainty of vacating the home, inability to develop long lasting social bonds and the inconvenience of displacing children. Rents often increase over time and unlike an EMI, are an expense and not an investment.

Forced Saving Mechanism:

Investing in real estate is a forced saving mechanism, ensuring the investor builds a valuable asset over time. Unlike other liquid investments, a home cannot be quickly sold, promoting long-term financial discipline.

Real Estate Investing: Success Formula

  • Clearly State Investment Objectives:

    Specify your objectives. Are you seeking rental income, capital appreciation, or both? Well-defined objectives will direct your investing choices.

  • Carry out Comprehensive Research:

    Study the market, become familiar with property patterns in the area you want to target, and examine previous price changes. Resources that might be helpful include market statistics, and consultant reports from reliable sources.

  • Select a Reputed Developer:

    Investing in a project by a reputed developer might help reduce the risks related to construction quality or delays.

  • Location, Location, Location:

    It’s extremely important to choose the right location when investing, think great connectivity, good social infrastructure like schools, colleges, hospitals and easy access to the airport and business / tech parks. Areas in Mumbai like Chembur and Dombivili, North and East Bengaluru and Mundhwa and Keshav Nagar in Pune are some key locations to consider.

  • Think Long-Term: 

    Investing in real estate takes time. If you want to see substantial capital appreciation, be ready to hold on to it for a few years.

Choosing between various investment options and weighing the unique characteristics and factors associated with each asset class is imperative for investors. Consider financial goals, risk tolerance, and investment horizon. A well-diversified portfolio comprising a range of assets can offer a balanced approach to wealth creation and risk management.