Back in 1977, Naresh Patel had scrapped together his savings of Rs1 lakh to construct in independent house in Ahmedabad. Recently, before settling with his son in Mumbai, he decided to sell his house and was over the moon when he got Rs1.1cr for the house. How good was that as an investment? Let us look at it differently. Had he invested the same Rs1 lakh in the Reliance IPO in 1977, it would have been worth Rs16cr today.
Better still, if he had invested Rs1 lakh in Wipro 3 years later in 1980, it would be worth Rs6,200cr today or fairly close to $900mn. To cut the long story short, the house may have been a hundred-bagger, but the annualized returns are around 11.9%, which is good, but nothing to write home about!
That brings us back to the basic question: what is a better investment – equities or real estate?
Debate in perspective: Considering real estate as an investment
The case of Naresh Patel may not exactly be illustrative because he had bought the house for his family to live in. What we are referring to here is allocating money to real estate as an investment. Generations of Indians have grown up believing that nothing beats gold and property as investments. Had you purchased a property in Mumbai in 2002 or 2003, you would have seen smart appreciation in price by 2008. However, in the last 4 years property prices across Mumbai, Delhi, and Bengaluru have hardly given worthwhile returns.
Let us compare real estate and equities on five key parameters:
Tangible vs. intangible asset
One of the big arguments for real estate has been its tangible nature. You can actually see and experience the property. You can either live in it or lease it out. Either ways, it has an economic value. On the other hand, equities are just an entry in your demat account and quite often investors don’t know what happens inside the company.
To be fair, Indian equities have come a long way. Stricter regulation by SEBI, greater flow of information in the market place, and greater corporate governance onus on promoters has changed all that. Promoters are wary because any laxity means that the stock price bears the brunt. However, some gray area regarding stocks still remains. Equities are homogenous; real estate is heterogeneous
For an investor, equity is flexible and also homogenous. When you own SBI in your demat account, it is the same whether you own 10 shares or 10,000 shares and whether you live in Mumbai or elsewhere. The cost of holding equities is also much lower. You open a trading cum demat account and everything moves in and out electronically. Post-demat, corporate actions to dividends to transfers and transmission are seamless and hassle-free.
Real estate can be a lot more challenging. There are state-level RERA Acts while stamp duties and registration charges differ from state to state. GST is an added burden. The big challenge is the lack of proper title papers and link documents leading to a plethora of disputes. Real estate investments also are costly in terms of maintenance, municipal charges, paying for infrastructure, etc. Of course, a lot of these problems can be solved by REITs, but that is still to take off in a big way in India. Also, returns are city-centric.
To get rid of real estate would always be tougher compared to equities given that there’s a ready market for buyers and sellers for the latter. Selling of real estate is a time-consuming task and may not fetch you money when you need it.
Proof of the pudding: What about returns
Returns on realty and equities usually depends on GDP growth. For example, if real GDP grows at 7.5%, real estate could give CAGR returns of 10-12%, while equities could give returns of 15-17% on an average. Let us look at how Select Funds and Real Estate in Select Cities have performed in the last 5 years.
Source: Realty returns - economic times; MF returns - Value Research
Equities have been clear outperformers over realty in the last five years. Of course, there are cycles, but over longer periods, equities do tend to create wealth more effectively.
Finally, what about taxation?
This is one area where realty as an investment scores. You get tax exemption up to Rs2 lakh per annum on interest on home loans under Section 24 of the Income Tax Act. There is an additional exemption under Section 80C for the principal component. You can also take the property in joint names and double the tax benefits. When the property is sold, you pay long-term capital gains (LTCG) after indexation. You can also avoid this tax through Section 54 options.
Equities are at a slight disadvantage considering that now dividends are subject to dividend distribution tax (DDT) and also taxed beyond the threshold of Rs10 lakh. In addition, LTCG is taxable at 10% on capital gains above Rs1 lakh per year on a flat basis without indexation. This may give a minor tax edge to realty.
However, considering aspects such as liquidity, transparency, and wealth generation potential, equity still holds the edge as a wealth creator.