Is It Still a Good Time to Invest in Real Estate?

At least once every week, I do come across a question from my colleagues or friends if I have invested as yet in any property in Delhi NCR. The answer always remains in the negative, since I have been looking for a suitable yet reasonable property, which is tougher than finding a genie in a lamp in these times of sky-rocketing property prices in Delhi NCR.

Even though my motive of investing into real estate is to buy a property for self-occupation and save on the rent, I get suggestions to invest into real estate for investment purposes by my colleagues who also show how their 200 Sq. Yards apartment in Mayur Vihar bought 25 years back is worth 2.5 crores now.

Rising Property Prices, a Thing of Past

While the figures seem too lucrative to just ignore, going a little into research shows how the real estate prices are in a steady to negative territory in recent times. I checked out trends of property prices over the last 7 years in two of the well-known localities in South Delhi – Malviya Nagar and Green Park, courtesy www.99acres.com. The figures per sq. ft. were no doubt different, they both showed similar trend.

In Malviya Nagar, property prices were Rs. 5,780/- per Sq. ft. in 2009 and increased to Rs. 10,880/- per Sq. ft. in 2016. The property prices touched a high of Rs. 13,005/- per sq. ft. in 2012 and then started coming down.

Hence, the compounded annual return for a property in Malviya Nagar in 7 years was a meagre 9.45%, inspite of the fact that they seem to have almost doubled.

Similarly, in Green Park, property prices were Rs. 8,500/- per Sq. ft. in 2009 and increased to Rs. 17,510/- per Sq. ft. in 2016. The property prices touched a high of Rs. 18,997/- per sq. ft. in 2012 and then started coming down.

Hence, the compounded annual return for a property in Green Park in 7 years was slightly better at 10.88%, but still not much to aspire for.

Comparing these returns with equity investments, the same are nothing to celebrate, considering BSE Sensex returned 16.38% CAGR over this period. Even when I check in some other areas, similar trend emerges. Most of the properties have indeed given a negative return over the past one year, since the real estate sector is fighting from issues like low demand.

Is It a Good time to Invest in Real Estate Now?

Given the fact that property prices have gone down a little from their peak highs, it is obvious to consider if it is a good time to invest into real estate now.

However, before considering this big-ticket expense as an investment option, you must consider the interest rates and expected returns. Real estate investments call for high upfront payment. Do you have the money for downpayment. Next step is home loans being offered by banks and financial institutions. You generally pay EMIs for a minimum period of 20 years. Take that into account.

The Real Returns from the Investment out of Borrowed Funds

You must always consider the interest you pay on loan and the returns expected from capital appreciation. Let us use some figures to help you understand. Assuming you have taken a home loan of Rs. 1.04 crores to fund a 200 sq. yards property in Malviya Nagar for 8 years. In all these years, you would have paid Rs. 0.48 crores as interest, taking the total investment cost to be Rs. 1.52 crores, and the property is now valued Rs. 1.96 crores. So, no doubt the investment has given positive returns, the returns of Rs. 0.44 crores over 8 years translate into a measly 3.69%, while you would have got 4% by just keeping the money in Savings Accounts.

Further, one must also consider the liquidity aspect before committing large funds and possibly, your future goals into this big-ticket investment, since the high-value properties may not be easy to dispose off in the market, especially in the present day damp scenario.

REITs, an Ideal Tool to Diversify into Real Estate

If you are still interested in the idea of investing in real estate inspite of it offering just the normal returns, Real Estate Investment Trusts (REITs) come to your rescue.

REITs pool the money from investors and invest it in real estate properties. These instruments are slowly evolving in the sector and allow exposure to the real estate sector with an amount as low as Rs. 1 lakh. Since REITs require low investment, one can effectively reap benefits of the appreciation and rentals to a good commercial property.

Further, REITs also offers a solution to illiquidity concerns since the investor can sell off the units through stock exchanges.

So, while investing in real estate for the sole purpose of investment may not still be desirable given par or even sub-par returns given in the recent times, it is still advisable to diversify your investment portfolio through REITs which provide benefits of liquidity besides easy entry and exit.

Do share your thoughts on this in the comments.

Simardeep Singh is a Chartered Accountant based in Delhi. He loves sharing his knowledge about personal finance and investment. He blogs regularly at  www.simardeep.com.