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A close look at Real Estate Returns in India

December 6th, 2009 by Manish Chauhan on December 6, 2009 “The current market value of my flat in Mumbai is close to 1 crore , I bought it at 28 lacs in year 2000. The returns have been Mind boggling 72 lacs in 9 years, i.e 8 lacs a year approx , more than my current salary and now I am planning to invest more in real estate instead of Equity, What do you think” . A not so close friend was discussing his Real Estate portfolio with me. He belongs to first category of common sense deprived idiots, who do not understand mathematics well. 28 lacs flat became 1 crore in Value in 9 yrs, The returns are great ,but not exceptional enough to make someone eyes pop out . Simple maths will tell you that its 15.2% CAGR return over 9 yrs . Now whats so great return about this 15.2% Return ? 15.2% return over long term is desirable and great and whats normal return from Real estate in last decade in our Country , The only thing irritating is how people make fuss about it . Even Gold has outperformed , Gold was $300 per ounce in 2001 and now its close to $1100 ounce , that’s 15.5% return , 0.3% more . On the top of that Builders are not keeping their promises of Delivering Projects on Time and with same quality Promised. Real estate investments has caught everyone’s attention in the past decade and every Tom , Dick and Harry with 5 lacs salary tries to grab a 40 lacs flat . I will try to throw some light on Average Real estate returns in past 8-9 yrs in India . Coming back to my Friend, I told him that its been a very good return, and I appreciate his timing, Good job. But definitely he is bragging more than it deserves. A second person (his friend) suddenly comes to his rescue and challenges me . “But Manish , I bought a a flat in 2003 @20 Lacs with 3 lacs of down payment and rest a home loan. I spent total of 7 lacs till date and the flat is already quoting around 60 lacs, that 40 lacs of profit in just 3 yrs through investment of 7 lacs, that’s 78% return on annual basis” , showing off his fast calculations skills and giving me a “anything-else-you-young-financial-planner” looks his face . These people are from another category of “common sense deprived and mathematically challenged” people . It is worse than first category . The problem with these people is that they do not understand “leveraging” .A situation of sitting on huge profits by just investing a small amount as down-payment and rest with home loan is pure example of leverage and very common in India , This gives a feel to people that they are very smart. These people never consider the case when their house value drops by a big margin like say 15 lacs and they have just invested 5 lacs from their pocket, then they are in loss of -300% (absolute). But as you know , Investors like to consider a rosy picture, they somehow believe that it cant be the case with them . As US citizens who bought Real estate in the middle of the Bubble just because credit was cheap and they could have made a lot of money by taking a Home loan and almost nil Down payment, When Real Estate broke in US , people who has put $10,000 from their pockets for a $4 million house were in losses of $1 millions , because they had to pay $4 million a loan money for

That’s the problem of Leverage . I dont know how that is calculated but a common sense way of calculating it is to take a sample 0f real estate plots/flats in a area (for example 1000 units) and calculating the appreciation in value from last 6 months .That’s a unrealised loss of $1 million in a short time . some times your skills of explanation is limited to blogs only . It covers all the major cities and the sub-areas in that city . Its updated once every 6 months . India is a success story and housing is scarce .something which is now costing $3 million . Lets see the RESIDEX values for 5 cities Here is the chart of the same table . With my amazing quality of self control . Its called Residex and maintained by National Housing Bank in India . Investors never think about this . Please understand that these prices are average real estate prices and not some general case which would negate what we discuss here today. The index Value over time will tell you how is real estate prices doing in some area or city. that’s enough for them to take a chance. i kept all this in my mind and didn’t argue with him. What is RESIDEX ? Dont feel amazed if I tell you that there is an Index for tracking Real Estate in India .

Thats a lot of money and people are excited to see that much money .What is the mistake people do when they calculate Returns ? The beautiful mistake which everyone does is that they calculate pure absolute returns from Real estate which is in many lacs of rupees obviously. Investors forget the risk taken to get some return and only concentrate on Return part . They are sitting on a 30 lacs profit. So given a time frame of 1 yr . personally I am not very much excited then . If you consider the risk taken for the return people have got in Real estate . A tool to find out if an investment suits you . You could have made more returns if you had invested in Equity (SIP in mutual funds in some top funds) . . but you also have to see that they invested damn 30 lacs !! for that. What you have to see is how much return you got from something after adjusting the risk taken for that . So if a person invested 30 lacs in a flat and it becomes 60 lacs in 5 yrs. which is not every one’s cup of tea and the returns are normal 14-15% return/year on investment if you compare it with Gold or Equity. See an Article on GFactor .

Not that I discourage people from taking a home loan and invest in real estate . its pure leveraging .. I Would be personally disappointed a lot . and understand and accept the risk involved. you can find out the CAGR return of Real Estate in different cities . Chart f or the same data . There are better ways of leveraging than this . then its called Speculation . This kind of Leveraging is still nothing in front of Options trading in Nifty or some Stocks . Options trading is something I would recommend who have great risk appetite and dream of millions in short span of time . its amazing !! If you invest in Real estate and make 10%. be ready for it . its just fine . Let me show that for 5 cities in India . Better than real estate . Its ok If you invest in Equity and make 11% . Some smart (second category people) people think that they can buy Real Estate on loan and make 30-40 lacs in 4-5 yrs from house value appreciation . but dont over do it . What is Average Real Estate Returns in India IF we see the above chart of RESIDEX Values (for 8. If you precalculate it and consider it .    If you do a FD and make 9% . But this exposes them to a great amount of risk which they dont understand . not a big deal If you speculate in Options for one year and make your money grow by 500% .5 years) . While that is possible and has happened to a lot of them and definitely the return would be amazing . “Risk happens when you have no idea what you are doing” . which is my favorite .

I would be surprised to see a big bubble burst in India like we saw in 2007 .5 yrs of data . I do not feel they are justified and the prices are mainly driven because of unnatural demand created by easy access to Loan . If you want more than 1 BHK . believe me they are making similar returns which you can make from Equity. What do you think about the Real Estate Prices at the moment in India . Note : Understand that whatever we have talked here is based on the RESIDEX index and there will be many specific cases which would make this all talk a nonsense . What Should you Do ? First of all . Note that you cant get all data of Residex at one place . Buy a 1 BHK which you can afford if you want to live in it . 25% . There is no rush. There was a shift in Base year because of which I had to do so . understand that Real Estate is important and You should always invest in it for Diversification of your Portfolio (If you can afford it right now) .Download More data on Residex from HERE (From 20012007) and after 2007 HERE . 25% .Note : I have assigned Index value for “India” by assigning weights of 25% . Leave your Comments and let me know you are reading this blog . 10% and 15% to all five citites in same order . make sure you afford it. take it later . but can not afford it . . If things continue for some more years . People buy it . just that the magnitude of profits they are making is high . But that does not mean compromising with your Risk Appetite and investing just for the sake of Investing. Don’t feel left out when you see others minting money in Real Estate . If you want to buy home . not the returns on average . Real Estate is not the last thing in the world . but we have to look at general case and not a specific case . So Chill !! . plan for it . I combined the data from NHB from 2001-2007 and combined it with data on their Website to construct all 8.

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