A close look at Real Estate Returns in India

“The current market value of my flat in Mumbai is close to 1 crore , I bought it at 28 lacs in year 2000. The returns have been Mind boggling 72 lacs in 9 years, i.e 8 lacs a year approx , more than my current salary and now I am planning to invest more in real estate instead of Equity, What do you think” . A not so close friend was discussing his Real Estate portfolio with me.

He belongs to first category of common sense deprived idiots, who do not understand mathematics well. 28 lacs flat became 1 crore in Value in 9 yrs, The returns are great ,but not exceptional enough to make someone eyes pop out . Simple maths will tell you that its 15.2% CAGR return over 9 yrs . Now whats so great return about this 15.2% Return ? 15.2% return over long term is desirable and great and whats normal return from Real estate in last decade in our Country , The only thing irritating is how people make fuss about it .  Even Gold has outperformed , Gold was $300 per ounce in 2001 and now its close to $1100 ounce , that’s 15.5% return , 0.3% more . On the top of that Builders are not keeping their promises of Delivering Projects on Time and with same quality Promised.

Real estate investments has caught everyone’s attention in the past decade and every Tom , Dick and Harry with 5 lacs salary tries to grab a 40 lacs flat . I will try to throw some light on Average Real estate returns in past 8-9 yrs in India .

Coming back to my Friend, I told him that its been a very good return, and I appreciate his timing, Good job. But definitely he is bragging more than it deserves. A second person (his friend) suddenly comes to his rescue and challenges me . “But Manish , I bought a a flat in 2003  @20 Lacs with 3 lacs of down payment and rest a home loan. I  spent total of 7 lacs till date and the flat is already quoting around 60 lacs, that 40 lacs of profit in just 3 yrs through investment of 7 lacs, that’s 78% return on annual basis” , showing off his fast calculations skills and giving me a “anything-else-you-young-financial-planner” looks his face .

These people are from another category of “common sense deprived and mathematically challenged” people . It is worse than first category . The problem with these people is that they do not understand “leveraging” .A situation of sitting on huge profits by just investing a small amount as down-payment and rest with home loan is pure example of leverage and very common in India , This gives a feel to people that they are very smart. These people never consider the case when their house value drops by a big margin like say 15 lacs and they have just invested 5 lacs from their pocket, then they are in loss of -300% (absolute). But as you know , Investors like to consider a rosy picture, they somehow believe that it cant be the case with them . As US citizens who bought Real estate in the middle of the Bubble just because credit was cheap and they could have made a lot of money by taking a Home loan and almost nil Down payment, When Real Estate broke in US , people who has put $10,000 from their pockets for a $4 million house were in losses of $1 millions , because they had to pay $4 million a loan money for something which is now costing $3 million .That’s a unrealised loss of $1 million in a short time . That’s the problem of Leverage . Investors never think about this , India is a success story and housing is scarce , that’s enough for them to take a chance. With my amazing quality of self control , i kept all this in my mind and didn’t argue with him, some times your skills of explanation is limited to blogs only .

What is RESIDEX ?

Dont feel amazed if I tell you that there is an Index for tracking Real Estate in India . Its called Residex and maintained by National Housing Bank in India . Its updated once every 6 months . It covers all the major cities and the sub-areas in that city . The index Value over time will tell you how is real estate prices doing in some area or city. Please understand that these prices are average real estate prices and not some general case which would negate what we discuss here today. I dont know how that is calculated but a common sense way of calculating it is to take a sample 0f real estate plots/flats in a area (for example 1000 units) and calculating the appreciation in value from last 6 months .

Lets see the RESIDEX values for 5 cities

Here is the chart of the same table

What is the mistake people do when they calculate Returns ?

The beautiful mistake which everyone does is that they calculate pure absolute returns from Real estate which is in many lacs  of rupees obviously. So if a person invested 30 lacs in a flat and it becomes 60 lacs in 5 yrs. They are sitting on a 30 lacs profit. Thats a lot of money and people are excited to see that much money , but you also have to see that they invested damn 30 lacs !! for that, which is not every one’s cup of tea and the returns are normal 14-15% return/year on investment if you compare it with Gold or Equity. You could have made more returns if you had invested in Equity (SIP in mutual funds in some top funds) .  If you consider the risk taken for the return people have got in Real estate , personally I am not very much excited then , Investors forget the risk taken to get some return and only concentrate on Return part . See an Article on GFactor , A tool to find out if an investment suits you .

What you have to see is how much return you got from something after adjusting the risk taken for that . So given a time frame of 1 yr .

  • If you do a FD and make 9% , its amazing !!
  • If you invest in Real estate and make 10%, Its ok
  • If you invest in Equity and make 11% , its just fine .. not a big deal
  • If you speculate in Options for one year and make your money grow by 500% , I Would be personally disappointed a lot .

Some smart (second category people) people think that they can buy Real Estate on loan and make 30-40 lacs in 4-5 yrs from house value appreciation , While that is possible and has happened to a lot of them and definitely the return would be amazing . But this exposes them to a great amount of risk which they dont understand , its pure leveraging .  There are better ways of leveraging than this . This kind of Leveraging is still nothing in front of Options trading in Nifty or some Stocks . Not that I discourage people from taking a home loan and invest in real estate , but dont over do it , and understand and accept the risk involved, be ready for it . “Risk happens when you have no idea what you are doing”
. If you precalculate it and consider it , then its called Speculation , which is my favorite :) . Options trading is something I would recommend  who have great risk appetite and dream of millions in short span of time , Better than real estate .

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What is Average Real Estate Returns in India

IF we see the above chart of RESIDEX Values (for 8.5 years) , you can find out the CAGR return of Real Estate in different cities . Let me show that for 5 cities in India .

Chart f or the same data

Note : I have assigned Index value for “India” by assigning weights of 25% , 25% , 25% , 10% and 15% to all five citites in same order .

What Should you Do ?

First of all , understand that Real Estate is important and You should always invest in it for Diversification of your Portfolio (If you can afford it right now) . But that does not mean compromising with your Risk Appetite and investing just for the sake of Investing. If you want to buy home , make sure you afford it, Buy a 1 BHK which you can afford if you want to live in it . If you want more than 1 BHK , plan for it , take it later . There is no rush. Real Estate is not the last thing in the world . Don’t feel left out when you see others minting money in Real Estate , believe me they are making similar returns which you can make from Equity, just that the magnitude of profits they are making is high , not the returns on average . So Chill !! .

Note : Understand that whatever we have talked here is based on the RESIDEX index and there will be many specific cases which would make this all talk a nonsense , but we have to look at general case and not a specific case .Download More data on Residex from HERE (From 2001-2007) and after 2007 HERE . Note that you cant get all data of Residex at one place . I combined the data from NHB from 2001-2007 and combined it with data on their Website to construct all 8.5 yrs of data . There was a shift in Base year because of which I had to do so .

What do you think about the Real Estate Prices at the moment in India . I do not feel they are justified and the prices are mainly driven because of unnatural demand created by easy access to Loan . People buy it , but can not afford it , If things continue for some more years . I would be surprised to see a big bubble burst in India like we saw in 2007 .  Leave your Comments and let me know you are reading this blog .

Disclaimer : I have not invested in Real Estate, I am not very much excited about it and I dont have money for it .

320 CommentsAdd Comment

  1. Vineet

    Although I do agree with the idea of not buying a house but not solely on the basis of returns. What hasn’t been considered here is the opportunity cost of buying, that is , renting. That is the major comparison variable which should be used in the decision making along with(in) returns(unfortunately that hasn’t been considered).

    Here is the bigger picture: Rental yields in India are very low compared to the other nations.

    Example: Consider a 2 BHK in Mumbai which rents out for 40K per month.

    The purchase price of the similar flat would be around 2Cr.

    With 15% down payment (let’s just say 30 lakhs are lying around with you which can’t be invested anywhere else. Woah!), the EMI comes around to 1.5 lakhs + per month.

    Now compare that to 40K you were paying as rent. Even with the generous capital appreciation of 20%, you won’t start saving on this before 15 years. (all approx figures just to give the bigger picture)

    Oh wait, I effortlessly assumed that if you can pay 40K per month as rent, you can pay 150K as installment. No biggie! On the basis of HRA of 40 % ( metros), my salary would be 100K per month! (Case closed here!!)

    Case reopen: You are not going to buy a similar property as you would rent. You don’t want the same lifestyle when you have your own house.

    That makes any study impossible then! But anyway let’s look at it.

    So what we are saying is that the comparison should be apple to apple right? Let’s say our apple is the monthly outgo, then we are looking at a property which costs around 50 lakhs on which we can pay the approx 40K EMI for 20 years. Since we are still in Mumbai, we know what we can get in 50 lakhs. If you are happy with that lifestyle downgrade. Good for you! Just remember it won’t end!

  2. Subhash Chandra

    Very good article. I feel the worst thing that has happened in india in last decade is the exhorbitant rise in real estate prices. because of this common man is badly affected, sometimes without knowing. Due to high real estate prices most of the businesses have become uneconomical to run. Imagine a barber buying a space for his saloon for 50 lacs. after this whats his option – charge very high prices if he can otherwise suffer a big loss. Only a hope of being able to sell his shop keeps him surviving. similar is the case for people owning or renting shops everywhere. This results in higher costs to every consumer.
    High re prices are frustrating the young generation who wants to buy a flat for actual use. Black money generation is another evil of RE investment.
    Worst many indians have started thinking of this easy money – invest in RE and do nothing else productive- retarding the progress of society in general.
    Case of NOIDA farmers buying mercedes cars after selling their land and then later going back to reclaim the land is a case in point.
    I wish the govt takes note of all these disturbing trends and discourage investing in real estate.
    No body should be allowed to own more than 1 residential property in a city and maximum 2 all over India.
    PSBs must not be allowed to extend the repaymnet schedule of loans given to builders.
    Housing construction standards (like BS) must be developed and strictly implemented by govt.
    In my view housing is a need and not investment. Hoarding RE is more like hoarding essential commodities – which is a crime in India.

  3. In metro cities still there is huge potential atleast in affordable housing because of the initiative taken by the modi goverment housing for all by 2022 so if you invest in this sector it can give you good returns.

  4. Prashanth

    Dear Manish, thanks for the informative article. I am 28 yrs old, unmarried & I would like to start investing in mutual funds from now itself. I am right now not interested in opting for Real Estate as investment. However, I am facing a lot of opposition from my parents, close relatives and close friends with whom I discussed about the same. They are all of the opinion that I should only invest in FDs and Real Estate (that too, preferably flats).

    I tried to convince them about the benefits that mutual funds offer over Real Estate – the generally higher returns over the long term & that since it is liquid, I can quite easily shift my investment from a poorly-performing fund to a well-performing fund – now, if I purchased a flat and it did not appreciate as per my expected goal, will it be easy to sell it immediately and purchase a new one without much effort?

    Despite all these facts, my folks are still adamant – they say Real Estate is a time-tested proven approach of wealth appreciation which their fathers followed, their uncles followed and many of their friends are following & that on the other hand mutual funds are a new-fangled notion without proven track-record…some are even going to the extent of comparing mutual funds to gambling dens where I will end up recklessly blowing off my hard-earned money investing in unreliable and sometimes fraudulent schemes!!!

    Despite all this, I am sticking to my decision of going for mutual funds right now, but I am just expressing the amount of pressure and opposition I am facing because of it :)

    • Thanks for sharing that amazing experience you are having. I can totally understand your problem and its a issue with how one is experienced with this opposition. I will use your experience in one of my upcoming article

    • Nikhil

      Dear Prashanth

      Just a thought. Great economist Keynes once said that it is fine (read acceptable) to fail conventionally than to succeed unconventionally. Our society is crippled with age old idea of buying property. And I don’t blame them. LIC and property was all they knew about. Our time is different and we should adopt it accordingly.

      And to be frank, crowds of people submitting themselves to a lifelong of unaffordable debt actually excites me as I am definitely not gonna one of them. Each and everyone of them can’t be right at the same time. They can at most get a mediocre return. With equity I can at least be sure of 12% return. With some knowledge you should be able to enhance it to 15%. An option I would choose any day.

      Nikhil

    • Nikhil

      Your answer lies in the post. The data is not reliable for drawing a conclusion on the winner. And the most alarming fact is that real estate has grown 670% in 2008-2012. That got to be a big bubble like the 2000 IT bubble in US. People are paying anything for a house without any regard for their future liabilities. Wait some time and the prices shall fall. You at least need to give a window for a big IT recession to arrive where people lose (hopefully not) their jobs and can’t pay their EMIs. You will see a mortgage crisis.

      The Post:
      It said that the realty sector performance has been measured based on the average of the land rates (1991-2006) and circle rates (2007 onwards) set by the land and urban development authorities for residential property in Delhi.

      These have been used as a proxy for real estate prices since reliable data is not available for the period since 1991. Furthermore, the rental yields have been sourced from various new reports for the respective periods, the study said.

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