In this article, we compare investment in Real Estate vs Mutual Funds. Real Estate price trends across various major cities such as Mumbai, Delhi, Bangalore, Pune, Hyderabad and Kolkata are analyzed.
Residential Market in India
The Indian residential market has breached new lows in terms of supply and sales for every successive year of this decade. Despite the massive need for housing, India is facing huge unsold inventories.
There was a phase where the real estate market boomed between 1988 and 1994 when people saw the value of their go up by 10 times followed by a dip but picked right back up between 2002 and 2012. After 2012, the real estate market has stagnated.
An analysis has been done on the residential market of the top 8 cities in India. This article aims to be an epiphany for every investor in India who think the ultimate avenue for investing their money/savings in real estate. It’s time to move away from the cliché investing avenues which don’t actually yield what you expect.
Real Estate Vs Mutual Fund Yield Comparison
Investing in real estate can be a costly decision to make. Buying a house to live in is not considered an investment. Investing in a house to rent it out qualifies as an investment. Not sure about the returns you can get from investing in India? Here is a yield comparison made for top 8 cities in India with houses in the prime locations.
|City||Place||Area (Sft)||Value per sft(Rs)||Total Value(Rs)||City||Place||Area (Sft)||Rent (Rs) Per Month||Rent (Rs) Per Year||Return %||PE Ratio|
|Kolkata||Park Street||1,995||16,290||3.25 Cr||Kolkata||Park Street||1,700||65,000||7.80 lakhs||2.4%||41.66|
|Bangalore||Indira Nagar||1,800||9,444||1.70 Cr||Bangalore||Indira Nagar||1,550||39,000||4.68 lakhs||2.8%||36.32|
|Chennai||Madipakkam||1,414||5,572||78.80 lakhs||Chennai||Madipakkam||1,350||25,000||3 lakhs||3.8%||26.26|
|Pune||Hinjewadi||1,360||8,455||1.15 Cr||Pune||Hinjewadi||1,790||33,000||3.96 lakhs||3.4%||29.04|
|Mumbai||Bandra||1,100||66,363||7.30 Cr||Mumbai||Bandra||1,150||75,000||9 lakhs||1.2%||81.11|
|Ahmedabad||Navrangpura||1,575||5,950||2 Cr||Ahmedabad||Navrangpura||1,170||15,000||1.80 lakhs||0.9%||111.11|
|Delhi||Golf Links||2,400||70,833||16.99 Cr||Delhi||Golf Links||2,000||2,60,000||31.20 lakhs||1.8%||54.48|
|Hyderabad||Banjara Hills||1,800||8,888||1.60 Cr||Hyderabad||Banjara Hills||1,950||25,000||3 lakhs||1.9%||53.33|
Source: Magic Bricks
The houses in Chennai and Pune give a return above 3%. Kolkata and Bangalore fall next in line with an interest rate around 2.5% to 3%. Ahmedabad, Mumbai, Delhi and Hyderabad give 0.9%, 1.2%, 1.8%, and 1.9% respectively.
|USA:Purchase||USA:Rent||Rent Per Year/Value|
|City||Area (Sft)||Value per sft($)||Total Value($)||City||Area (Sft)||Rent ($) Per Month||Rent ($) Per Year||Return %||PE Ratio|
|New York||1,200||291.66||349.9K||New York||1,200||1,550||18,600||5.3%||18.81|
|UK:Purchase||UK:Rent||Rent Per Year/Value|
|City||Total Value(Pound)||City||Rent (Pound) Per week||Rent (Pound) Per Year||Return %||PE Ratio|
Whereas, in the US, houses in Chicago give the highest return of 8.8% followed by Seattle (8.2%) and New York (5.3%). In the UK, houses in Bristol gives the highest return of 6.3% followed by Manchester (6.2%) and London (5.3%).
India is lagging behind US and UK in the real estate market and clearly is not an attractive option for investment.
On comparing the returns of real estate from these countries it is observed that Indian real estate has high PE when compared to the other countries. A high PE, sometimes, means faster growth. Companies with high PE are anticipated to grow faster. Returns from Indian real estate are expected to grow more in the future. Currently, the returns are lower when compared to the other countries. Also, investing in Indian real estate could or could not yield a higher return in the future. During the short-term Indian real estate gives lesser return than US and UK.
Planning to sell off your house? Not sure how long will you take to sell it off? If you are in any of the top 8 cities here’s how many years you will take to sell off your house.
|Region||Iventory (Units)||Sales/year 2015 (Units)||Sales/Year 2016 (Units)||Sales/Year 2017 (Units)||Inventory (Years) Based on 2015 sales||Inventory (Years) Based on 2016 sales||Inventory (Years) Based on 2017 sales|
Source: Knight Frank
The sales in all the top 8 cities are below the 2015 levels. Mumbai and Pune are the only two cities that have seen 3-4% increase in sales from 2016. Bengaluru and Kolkata are the most impacted cities by demonetization with sales dropping by 20-25% when compared to 2016 levels. Hyderabad, Delhi, Chennai, and Ahmedabad saw a drop in sales up to 5% from 2016. With the drop in sales, unsold inventory has piled up leading to higher inventory years.
With the 2017 sales levels, it would take 4.43 years to sell the existing inventory in Delhi. This is followed by Bangalore with 3.16 years and Kolkata with 2.77 years. Mumbai (1.86 years), Ahmedabad (1.71 years), Chennai (1.59 years), Hyderabad (1.22 years) and Pune (0.84 years) follow suit.
With such high unsold inventory in the market, the prices of residential flats/houses are likely to come down and the sales growth is expected to be muted for the next few quarters. With unsold inventory piling up in the market the new launches have seen a slowdown too. The new launches in these cities have been cut down up to 70% from 2016 levels. The number of unsold inventory years looks smaller when taken on the base of 2015 sales but with demonetization in the picture, one will have to bank on 2017 numbers. One can only hope the residential real estate market to bounce back soon but real estate market looks plain for the next 4-7 years.
Owning vs. Renting
You can invest in the house to rent it out, but will it be a right decision? Will all the home buyers want to rent a house? This analysis will help both the home buyers and investors to understand the consequences of renting or owning a home. From the analysis, the following can be concluded:
The rent and the EMI you would be paying for an affordable home (850 sft) in Delhi is the same. So it is recommended that you own an affordable house in Delhi. It is recommended to rent out a budget (2000sft) and a luxury home (4500 sft) in Delhi as the EMI is higher than the rent.
The rent and the EMI you would be paying for an affordable home (500 sft) in Mumbai is the same. So it is recommended that you own an affordable house in Mumbai. 10 years from now, you would be paying the same rent and EMI in Mumbai for a budget home (1000sft). 16 years from now, you would be paying the same rent and EMI in Mumbai for a luxury home (1500 sft).
The rent and the EMI you would be paying for an affordable home (750 sft) in Chennai is the same. So it is recommended that you own an affordable house in Chennai than renting it out. Owning a budget home (1500 sft) and luxury home (2500 sft) can prove that you took a right decision 25 years down the line. But any time before that renting out can prove better for you.
Kolkata seems to be a better place for owning an affordable home (800 sft) than renting it out. Budget home (1800 sft) and luxury home (2400 sft) will take a little longer (25 years) to break even.
The Silicon Valley of India is better for owning an affordable home (850 sft). Budget (1600 sft) and the luxury (2700 sft) category have a breakeven of 16 and 20 years respectively.
If you were to own a home in the world capital of biryani then an affordable home (900 sft) will prove to be a better choice now than a budget (1650 sft) and luxury (2650 sft) with 17 and 18 years of breakeven respectively.
In Ahmedabad Affordable (800 sft) home can be owned now than renting it out. The budget (1550 sft) and luxury (2550 sft) home have a higher EMI than the rent for 21 years. So if you are deciding to buy a home in Ahmedabad, it will be beneficial in the long term.
Pune, even though being a younger city than any of the major metros, has a higher breakeven for the budget and luxury home categories than the others. A budget home (1600 sft) and luxury home (2400 sft) has 25 years each before one is paying an EMI similar to the rent. An affordable home (800sft) can be owned right away in Pune as the EMI you will be paying is less than the rent.
Investing in Mutual Funds vs Real Estate
Should you invest in mutual funds or real estate? If you chose not to own a house in the budget and luxury categories in top 8 cities and rather invest the leftover amount in the form of SIP’s at 12% per annum (after paying the rent) you can expect the following returns. A tenure of 20 and 25 years has been used for people who are living in budget and luxury rented houses respectively. The returns after the breakeven year are 0 as the rent will be higher than the EMI.
|City||Budget Home (Rs)||Luxury Home (Rs)|
|Delhi||1.62 Cr||8.71 Cr|
|Mumbai||12.58 lakhs||1.79 Cr|
|Chennai||57.64 lakhs||1.78 Cr|
|Kolkata||60.91 lakhs||1.33 Cr|
|Bengaluru||26.91 lakhs||1.15 Cr|
|Hyderabad||22.43 lakhs||75.46 lakhs|
|Ahmedabad||37.10 lakhs||98.99 lakhs|
|Pune||67.09 lakhs||1.51 Cr|
*Calculation of returns from monthly SIP’s after paying rent
The returns from the residential market are limited to a maximum of 4% in India. Mutual funds can give 15% annualized returns. You can see for yourself what a 12% annualized return over a period of 20 – 25 years can give you. Also, you can start investing in mutual funds with an amount as low as Rs 100 per month. With a large number of advisors in the market and various online platforms, investing in mutual funds is as easy as shopping online.
In my opinion, it is not the right time to invest in residential property for the purpose of renting it out. Measures, such as Demonetization, Goods and Services Tax (GST) and the Real Estate (Regulation and Development) Act, 2017 (RERA), that the government took to push the culture of transparency have irrevocably altered the course of the industry. The residential market is very delicate right now and the returns can waver with time. Mutual funds have historically given higher returns. With the market picking up the pace again one can only expect to look ahead and never turn back.