Returns from stocks and real estate

“I do not doubt any of the instances that you have quoted,Chetan. But at the same time there have been instances where investors in real estate have not fared so well. R. Ganesh had purchased a plot of land on the outskirts of Pune city 25 years ago for Rs 20,000. He continued to live in his house as the city grew,englufing his property. He was told his property will fetch at least Rs 3 crore. Being a person of frugal habits,he was not keen to move out of his house. He just willed it to his son Ravi. This gave Ravi the option to encash this large sum upon Ganesh’s death. After Ganesh died two years ago,Ravi has been trying hard to sell that piece of land. Unfortunately,the highest offer that he has received is for a few lakh. This is because a few years ago the government decided that no construction will be allowed in certain zones. This ban was in keeping with the government’s desire to conserve forests. Unfortunately,Ganesh’s house happens to be in one such zone. 

Similar instances have been witnessed by me in many more cases. Many apartments have been sold at very low prices because the structure has aged and the design is now considered outmoded. Their rooms are too small by today’s standards and the building is without an elevator. In another case,a friend of mine booked an apartment in a new fancy high rise under construction. He had paid over 75 per cent of the amount when the building went into litigation. It has been seven years and he has given up hope of receiving his money back. There have also been cases wherein plots of land have been encroached upon or have been reserved for playgrounds,thereby losing most of their value.

So,specific instances of sale can not be used to determine the returns from an asset class like real estate.

Stock returns

When you compare stock market returns,we talk of the returns that have been provided by a stock index such as the BSE Sensex or the NSE Nifty. These indices consist of 30 to 50 stocks across various industries in various parts of India. To compare returns of these indices with those from a single real estate deal is like comparing apples to oranges.

If one is to compare stock index returns with that of real estate,then we need a well diversified real estate index. It should consist of prices of a number of properties in different localities across India. Unfortunately,no such all India index exists.

If we have to compare instances of sale of real estate based on our personal experiences,then we may choose to compare them with a single stock that was purchased by ourselves or our friends. As you know,many small cap stocks have given returns of over 100 per cent. Would this mean that return from stocks is 100 per cent? No,such comparisons are incorrect,” I said.

Conclusion

Chetan nodded. He realised that unless an index for real estate existed,it was not possible to compare stock market returns with those from real estate. “By when do you think a real estate index will be developed and published?” he asked.

“The NHB (National Housing Bank) has developed an index for residential properties in some individual cities. However,this is not a pan-India index. Also,since 2007 is the base year for this index,historical data is not available easily. In the course of the next few years an all India composite index may be developed. Thereafter,comparing returns may be possible,” I replied.

“I understand,” said Chetan. He shook my hand,thanked me and left.

The author,a certified financial planner,is the chief executive of Sardesai finance. ceo@sardesai.com