Are investors being really foolish, in saying, “my property has doubled in eight years”, when they can double their money in the bank or post office in the same time with virtually zero risk?
“My grandparents always believed property and gold were the only two investments one needs to make”. Haven’t we heard this many a time, especially from seniors? Sometimes, some investors even consider taking loan at 60 years of age to acquire a property for their golden years. Why? Because they need to earn a rental income to supplement their retirement inflows.
Cons of real estate investing
If one were take a dispassionate view of real estate, this is what one would discover.
- Since real estate is an unregulated market burgeoning with the evils of black money that provide a haven for political money laundering, it is like the black horse, unaware and oblivious of its destination.
- Since it is not regulated, there is no true and proper valuation
- Property values have fallen in a block of 4-6 years and stagnated in value, thus resulting in negative returns for the same period in many parts of the country
- There are many costs such as stamp duty, registration, broker fees, agreement fees, maintenance fees, “fill my stomach fees” that add to the cost of the asset
- It is also illiquid. Once in, most are trapped, unable to sell and find liquidity when money is really needed.
- All this confusion and lack of clarity, is because there is no proper index to measure, monitor and update investors on the performance of their property.
Are investors being really foolish, in saying, “my property has doubled in eight years”, when they can double their money in the bank or post office in the same time with virtually zero risk?
Having said this, I am not suggesting property is not a good investment. But the blind leading the blind attitude is what agonizes me to think, and retort when a sixty year old comes to seek advice on property, or a software engineer, seeks advice on buying his second or third home, with a loan, or if someone compromises on their life goals like retirement, by withdrawing from their retirement kitty to fund their dream farm house or when someone has a vehicle, credit card and car loan and still wants to buy a house!
Investor Awareness is the key
There is nothing like a best or ideal investment avenue. Each asset class performs differently at different points of the economic and market cycles and goes through the boom and trough of a market cycle. Yes, that includes gold and property!
So, what is most important is asset allocation in a portfolio to ensure that an average return on the basket of assets stays above inflation, so that your wealth is preserved.
With only 3-5% savings being channeled into equity asset classes and mutual funds in India, compared to 77% in U.S*, 41% in Europe* 33% in U.K*, our equity market is highly undervalued. If this figure moves up to 15% in India, our equity markets will get a big “push” on performance without any dependence on the erratic FII inflows!
Sadly, today low financial awareness is one of the biggest roadblocks in channelizing savings in mutual funds and equities even though SEBI has tried to facilitate the penetration of small towns and increase geographical reach through measures such as hiking of the Total Expense Ratio (TER), introduction of Rajiv Gandhi Equity Scheme (RGESS) and waiver of PAN for small investors.
The remedy is to create high investor awareness of investments coupled with the emergence of a force of unbiased and “fiduciary” advisors who provide advice only in the interest of the client.
*Source: KPMG Report and RBI report FY 2012.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.