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Economy May 11, 2013

Discounting inflation, long-term return from realty is zero

By Firstbiz Editors

Breaking the myth that real state is an asset that gives high returns in the long term, an article in the Economic Times says that the sector is not a guarantee of profit.

To substantiate the point, author Ajay Shah, who is a professor at the National Institute of Public Finance and Policy, compares an a hypothetical investment made in Nariman Point, Mumbai, and the Nifty.

Housing matters. AFP

Housing matters. AFP

According to him, returns from and investment in Nariman Point commercial real estate offered -9 percent return over the last 19 years while the Nifty gave a 1 percent annual return. The underperformance of the real estate investment is because of the fall in the prices in the area with the increased supply.

And that is the problem with real estate. "Every time there is a real estate boom, it triggers off fresh construction. This supply quenches the boom," the article says.

Another point that Shah makes is that there is absolutely no shortage of land to house 1.2 billion people in India. "If you place 1.2 billion people in four-person homes of 1000 square feet each, and two workers of the family into office/factory space of 400 square feet, this requires roughly 1% of India's land area assuming an FSI of 1," he says.

The future story of Indian real estate will revolve around FSI, as policy makers will have no option but to increase this from the present one. Once this is increased, supply will further increase, he says. "New supply lies in wait."

These arguments are valid outside India too. "Net of inflation, real estate tends to produce roughly 0 over long periods, while equity indexes produce significant and positive returns after inflation," he says.

Investment in realty is also hurt by inadequate diversification, illiquidity and use of cash.

Read the full article here.

by Firstbiz Editors

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