Among the major asset classes are equity, debt, real estate and gold. Let’s examine real estate—its merits and demerits from an investment perspective.
In India, you can invest in real estate via: 1. house/flat/villa, etc; 2. plot/land; and 3. commercial property. Let’s save the first category for the last. Let me explore the first two. Land, as an investment, suffers the same demerits as gold. It doesn’t generate any income (unless it is used for agriculture). All you get are capital gains. Valuing land on the basis of price is not easy and don’t forget the liquidity. It is also a big-ticket investment and, hence, your point of entry and exit matter a lot (you can’t SIP it either). Plus there are no tax benefits. All points considered, it is not a great investment.
On the other hand, commercial property does provide a regular continuous income. But it is again a big-ticket investment with closed doors access to neta-babus. In my city, almost every mall/office has the backing of a politician. They are able to get access to plush land at throwaway prices. Even if a common man manages to get a piece in it, he should have the time and resources to manage it.
Again, there are no tax benefits. In addition, rental income can fluctuate, based on the prevailing environment.
This brings me to the final option—owning a house. People buy houses for two reasons: 1. either to live in them; or, 2. as an investment. If one buys it to live in, it doesn’t matter how much one shells out. I prefer to treat it as consumption. When I say consumption, it also implies that it can be deferred. It is a trend in our country that once a person starts earning, the next goal is to buy a house—all everyone sees is the tax benefit tied to it, the status symbol, the money drained in rent, etc. Little thought is given to investing in other assets, or building a corpus for other goals, EMI burden, etc. I think the priority after getting a job should be to build a corpus with various goals like house, car, marriage, etc.
Once you have a good corpus, you can make a down payment and, perhaps, even be left with a buffer. This should be the time to buy a house and enjoy the hard-earned savings.
In case one is buying a house as an investment (to buy in early stage and sell when ready to occupy or buy and sell in few years), one is settling for average returns. Consider this; if the house quotes a price, it has the price of the materials/labour/equipment used to build the house built into it. So you can think of it like the price of a house includes the price of cement, steel, land, labour, tiles, sanitary ware, electrical wiring, plumbing, etc. This also implies that the price of the house does not just reflect the price of individual components; it also includes a profit margin for each of the entities involved. To make it clearer, when you buy a consumer product like soap, chocolate bar, etc, it contributes a certain percentage to the profit of the entity manufacturing it. Similarly, when you buy a house, you are contributing to the profit of each entity whose goods/services are used in construction. You become part of an investment chain (similar to the food chain) where each person earns a profit.
A home-buyer (investor in this case) is the last entity and is probably paying the highest price for the asset, as profits of earlier links are built into the price. Even if he manages to sell the house for a decent profit, he could have earned a better return if he was higher up the investment chain.
With the help of hindsight, we can prove this. In the past five years, the real estate market has been muted. But do names like Havells, Kajaria Ceramics, Cera Sanitary Ware, Astral Polytech, Somany Ceramics ring a bell? While one could also say the opposite of this by investing in, say, DLF (a colleague of mine was about to invest in this company instead of buying a house), Unitech, cement companies, steel companies, etc, the point is: by trying to invest in real estate, we are opting for sub-optimal returns, as we are the last link in the chain. Real estate loses on all fronts—liquidity, taxation, transparency, etc.
Some people like to club tax benefits and the realised gains to show the total gains in an asset (for example, SBI’s tax-saving FD quoting 17% yield). I think this is a flawed model. Income saved by investing in tax-saving instruments is not my return. It is my own hard earned money. Let’s just call it saving—not returns. And seldom are we able to invest these savings—we consume them as part of monthly pay-cheque. Even if one manages to invest these savings, we can’t decide on the expected rate on return. It depends on various factors. Similarly, tax benefits from a home loan are not my return. In fact, as your tax bracket increases, a self-occupied home on an EMI and an almost equal HRA amount equalise each other. If one is, indeed, keen on saving the tax to the maximum, he should let it out. You can claim a 30% deduction on the rent before paying tax on rental income and enjoy deduction on the entire EMI interest.
Among other points that make me averse to invest/buy (consume) property are: involvement of black money, bribes for registration, maintenance of the property, etc. But the major point is big-ticket investment. I don’t know if this is good or bad, but I just can't think of investing/saving lump-sum. The very idea of keeping aside some money every month and then making a purchase is uncomfortable for me. In the process, I might dip occasionally into my savings and deplete them. I rather like the periodic investment approach, as far as possible, in whatever asset class.
I sometimes wonder why Indians are crazy about buying houses. You see, the best things are never advertised or preached. No one tells you in school or college the importance of investment, or the importance of equity in wealth creation.
Similarly, you don’t see advertisements for term plans, health insurance, or top-performing mutual funds. Instead, you see ads for colas, water purifiers, toothpastes, chocolates and what not. If this is true, don’t advertisements for flats imply the same? Is it really an investment? Or are we just a consumer? And if real estate is really an investment, why is someone selling it to me? Why not invest yourself and get rich? In the end, it is no different from any other consumer product; for the builder it is a business.
Pravesh Pandya, by email
Luring unsuspecting people
A couple of weeks ago, I received an invitation on Linked In from an individual whose profile read as deputy chief operating officer of a company in Chennai. As is the norm, I accepted the invite. After a few days, the person sent me an email asking me to leave my contact details with him as he wished to speak to me regarding a potential opportunity. I presumed that he was talking about a future opportunity so I did not flinch from sharing my details with him.
A few days later, this gentleman called me and told me about a potential opportunity from which I could earn additional income and that the effort was being steered by a group of individuals from IIMs and IITs. Being a cerebral guy, I was thrilled. I thought this may be an opportunity to get additional income by doing something creative (like management consulting, writing a book, etc).
On the scheduled day (it was a hot Sunday afternoon), I met this individual at the spot that we had agreed to meet. He picked me up from the bus stop in his car and led me to a venue where about 25 people seated in the dining room of a bungalow.
Within a few minutes, an IT geek, calling himself a product of Great Lakes Institute (Chennai), introduced himself and spoke at length about job losses, need to earn additional income, etc. To give the devil his due, he was articulate and made sense when he spoke to all of us. After about an hour, the penny dropped, as one of their team members started displaying Amway products one by one.
I had to excuse myself from the meeting and expressed my disappointment to my host. I told him that since he had mentioned about IIT/IIM graduates, I thought it was an academic opportunity. But my host prevaricated in giving a reply.
Through the columns of Moneylife, I request all readers to be careful while accepting Linked In invites and also whenever someone calls you offering an opportunity for earning additional income. Do insist on getting the full details. The modus operandi of most of these people is that they never tell you about it in the beginning. So, you end up wasting your time and money on a multi-level marketing scheme that you may not be interested in. This is one more example of how social networking tools are being misused.
G Venkatesh, by email
Penalty for enterprise?
This is with regard to “CSR Needs a Re-think” by Sucheta Dalal. Compulsory CSR is the refuge of a bankrupt and immoral government. Paying extortionist income-tax itself is more than enough to give back to society. With enough indirect taxes and income taxes, CSR is a penalty for efficiency and enterprise.
Wonder if prime minister Narendra Modi and his RSS team will have the courage to roll this back?
R Balakrishnan, online comment