Buying real estate where prices haven't already appreciated - in tier 2 & 3 cities or on the outskirts of a metro - is like buying a small-cap stock hoping it becomes large-cap, according to Zerodha co-founder Nithin Kamath.
While all this can mean good return on investment (ROI), it is a high-risk strategy and hence capital allocation should be lower, Kamath tweeted, adding that real estate is unlikely to beat inflation and interest costs in the long run.
"The question to ask when investing in real estate: Is the property yield greater than inflation? If yield -ve, the price has to go up by at least 10% per yr to beat inflation, or the price has to double every 7 years," Kamath says.
For the price of the property to double every seven years, the rents also have to go up as much which is not happening in most places in India, Kamath points out. "For eg, if a flat costing Rs 1cr can be rented at Rs 20k/month. For the price to go to Rs 2 cr, ideally rent has to go to Rs 40k/month as well," he adds.
Of course, like stocks, real estate prices can also go up without good fundamentals. Usually when that happens, stocks, real estate, crypto, etc., prices don't stay up there for too long. For real estate, rental yields are probably the best measure of fundamentals," says Kamath.
Real estate is illiquid, just like private market valuations. Real price versus last transacted price that sellers claim could be way off, the Zerodha CEO says. "The other risk is since the price is fixed & paid upfront, you can't take advantage of price fluctuations through a SIP as in Stocks or MF," he adds.
A house will provide financial and emotional security, but financial returns as an investment won't be enough to cover for retirement as in the past, says Kamath.
This comes at a time when sales of residential units in India during the first half of calendar year 2022 hit a nine-year high of 158,705 units across top eight cities such as Mumbai, National Capital Region (NCR), Bengaluru, Pune, Chennai, Hyderabad, Kolkata and Ahmedabad, according to the latest Knight Frank India survey.
This is a 60% year-on-year jump compared with 99,416 residential units sold across these metros in H1 2021 and 19% higher than the preceding period of H2 2021.
Low interest rates and comparatively low home prices along with the renewed need for home ownership sparked by the pandemic, have been the primary drivers for this growth, the survey says.
Prices have grown in year-on-year terms across all markets for the first time since H2 2015, the survey shows. Prices increased in the range of 3- 9% YoY across markets with prices in the larger markets of Mumbai, NCR and Bengaluru moving at the top of this growth band at 6%, 7% and 9% YoY respectively.
Demand momentum was strong across markets in H1 2022 and Kolkata was the only market which saw sales volumes drop in sequential terms.
With the second largest share of sales, NCR was the biggest mover among all the markets with sales volumes vaulting by 154% YoY during the period.
Mumbai accounted for 28% of the total sales, highest among all markets. Among other large markets, Bengaluru had a similar strong showing with sales growing 80% YoY in H1 2022 to 26,667 units.