In my linkfest today, I had linked to R Jagannathan’s article “Why property is the biggest con job for investors”
I confess that I have a soft corner for R Jagannathan-I often see him early mornings taking brisk walks while vigorously twisting his wrists.
But he does not do justice to realty as an investment option.
He raises some pertinent points:
1.Property prices rising due to land shortage is a myth.Increased FSI can solve land scarcity issues
2.Property prices can rise as well as fall.Why his Thane flat did not go up in price for 6-8 years !
3.Laws of demand and supply will catch up with the reality of unaffordability
Now lets examine each of these points.
The first point about increased FSI solving land shortage issues.There are numerous court judgements related to FSI.The Navi Mumbai Municipal Corporation wanted to raise the FSI to 1.5. The Court stayed the move for 4 years !It vacated the stay only when statutory provisions were brought into effect prescribing the maximum FSI !
Our cities infrastructure is already coming apart (water,sewage,electricity,schools,roads etc).Can existing infrastructure support a FSI of 8/9?The answer is NO and hence the restriction on FSI
2.Property prices can rise as well as fall.This is very much true.However, if one has an investment horizon of 25-30 years, nearly all realty options in India-residential, retail,warehouses,land etc have given fabulous returns.The reason is two fold-increasing population and inflation
One possible exception is commercial realty.In India,commercial realty is an investment option only in 6-8 cities.Their prices fluctuate/decline as the population centre moves or new modern alternatives develop.In case of Nariman Point, prices fell as more people moved to the suburbs and better options like BKC etc developed
3.Is the Indian real estate market unaffordable to people?The answer is that for large parts of the market the answer is Yes.One can indeed expect a price correction as well as a time correction.But for the astute investor, there can be bargains/special situations even in the realty sector.Special situations in realty can be of all types-people made a killing when Jharkhand was declared a separate state, some people benefited when Mundra port got developed etc.Now the smart money is looking at the Delhi-Mumbai Industrial Corridor for their next multibagger returns.
Well, then what is the future of realty in India?
Well, the answer lies in a mega trend.I had earlier posted about a huge mega trend that will play out in the next 30-40 years.According to United Nations, our Indian cities will add around 500 million people to the existing urban populations in the next 40 years !
This mega trend and structural inflation are the solid bedrock on which real estate prices will keep increasing.
Now, let me end with a family anecdote.One of my uncles bought a flat on the outskirts of Mumbai in 1976 for around Rs. 40/sq feet.Now, the price is around 10000 Rs/sq feet.This translates into a compounded return of around 16%. This capital appreciation+Rentals handily beats inflation and other investment options like equity,gold etc
Readers may check with their own families for anecdotal evidence of the compounding power of real estate over long periods.One such interesting anecdote is posted here.