One of the biggest questions for anyone building their investment portfolio is “Whether I should invest in Real Estate or Equity?” The answer arguably is; both - Real Estate and Equity.
One of the most important determinants of the returns from an asset class are what assets are chosen within that asset class, the timing and duration that the asset is held. So, whether it be picking companies or mutual funds while investing in equity or choosing the right location and project while investing in real estate.
However, within real estate, this takes on even more significance as returns vary tremendously over locations and market cycles and since the transaction costs are very high, it is virtually impossible to switch properties if the initial decision doesn’t turn out to be the correct one.
Now, while the stock market has an index that allows us to scientifically measure the rate of the return, the job is a lot harder for real estate. Specific cases in certain locations have generated far higher returns that others across land, residential, retail and commercial spaces across the country. According to a study by Cians Analytics on the returns from various asset classes in India during 1991-2013, real estate and equity have given maximum returns to investors. Looking at the overall returns, the study stated that real estate outperformed all other asset classes during the 23-year period with an annualised rate of 20%, while equity generated an annualized return of 15.5% on a nominal basis during the past 23 years. However, the equity market has beaten all other asset classes for the 23-year period ending December 2018.
Let’s not forget the value of rent or lease. When you invest in stocks, you only earn returns and dividend. Whereas, in real estate, you have the option of either leasing or renting the property. This way, an investor can earn additional regular returns while the value of the property is appreciating. The rent is usually higher than the dividend. The release of dividend and the quantum of it are uncertain and irregular, but rent can be earned every month.
Another point that you, as an investor, must consider is the liquidity rate. Equity stocks come with a high liquidity rate, meaning, you can sell the shares and convert them into money easily. On the other hand, it takes really long for an investor to liquidate their real estate asset. It’s a hassle-filled process. Therefore, if you are looking at investment options that have a high liquidity rate for the short run, then stocks are a great option. However, if you can stay put with your investment, then real estate is a great option.
Lastly, if you are planning on starting with a smaller value and cannot avail loan, then equity gives you the liberty to start your investment with any value. Moreover, with the SIP option, you can plan your equity investment in a way such that over a period of time, you have substantial corpus as well as returns earned through the magical effect of compound interest. On the flip side, if you can avail a loan, then you must consider real estate investment and later rent out the property. The money earned through the rent can be used to repay the EMI. This way, there is no additional stress on your finances.
However, experts say that the battle is not between real estate or equity. It is deciding when to invest and how much to invest in each of these sectors. While both asset classes have their merits, real estate as an asset class seems to offer a far high promise to an investor who is willing to stay invested for the long term.
The author is CEO, Radha Madhav Developers, Sufalam Infra Projects Ltd.