Real Estate - Should you invest now?

[MRAMDAS]

Dear friends,

Real estate as an asset class is the darling of the masses. Most people
think it is a magic wand that will simply multiply their money over time -
and more importantly, it can NEVER FAIL. But a look at recent history will
show that the big melt down in the US markets, and consequently the world
capital markets, was due to over valuation of real estate - and it fell over
50% when the fall came. China too is now teethering on a real estate
crisis. So watch out if you are a big fan of real estate.

I am reproducing below an excerpt from an article of "Equity Master" on real
estate investments.

Please write back on whether you agree or disagree.

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Our long time readers would be well aware of our views on real estate as an
asset class. Not only is it a large ticket size investment, but is also way
less liquid and riskier in some sense. The influence of black money and cash
transactions in the sector makes it all the more dirty. Not to mention the
relatively unfriendly taxes that this asset class attracts. Further,
investors' ROI can go for a toss if the properties are not delivered on time
- essentially it would be difficult for buyer to be 'in the know' on when
the possession will come into his hands as it is pretty much dependent on
the builder and his credibility - the latter which can go for a toss
overnight in certain cases.
Did real estate as an investment make sense?

Today's chart of the day shows the average per annum returns as indicated by
the city wise housing price index (NHB Residex) . The returns are calculated
from the start of 2007 till September last year. While there have been
certain cities that have done well, the same cannot be said about returns
across. The average combined returns for all of the above mentioned cities
came in at 8.7% per annum. While returns in Chennai and Mumbai markets have
been good, housing investments in cities such as Bangalore and Hyderabad
have been poor.

We reiterate our view that while real estate investment may make sense for
the purpose of diversification, it is not a route most can afford. And
taking on loan to fund the same would be a big no-no as per us. Earlier this
year, at the Equitymaster conference 2015, real estate investor, developer &
Co-Founder of Primary Advisors, Ashwin Ramesh had provided some key insights
on investing in this asset class. He was of the view that for people looking
to invest in properties, it would be essential for them to be close to the
property so as to manage it better. This is an important piece of advice we
believe, which should not be ignored.

Today's edition of the Mint carried out an article which used the above
chart for making a case for not investing in real estate. The author was of
the view that to make a killing in real estate, one would need to time the
market and the location very well. Secondly, the average annual return on
real estate over the long term is less than the average returns on equities.
The author further added that rental yields in the range of 2-3% in key
metros only go on to indicate how overbought the asset class may be; instead
one would be better of earning more post tax returns from deposits.

We couldn't agree more!