Real estate over the past few years have been on the upswing. The highs of 2007-08 have been surpassed and few areas are currently quoting at even 40-50% premium than previous highs. It has indeed been the most preferred asset class for Indian Households, so the million dollar question is whether you would continue to see such sharp up moves in real estate?
The answer to this question is not simple. It’s more to do with your expectation of the returns. Historically, it’s seen that over the past 25 years real estate has given a compounded annualized return in the range of 17-18% as compared to equities which has give returns in the range of 15-16%, Gold in the range of 7-8% & fixed deposits which in the range of 6-7%.
Rs. 1,00,000/- invested 25 years ago in real estate would have become 50 times i.e. Rs.50,00,000/-
The thumb rule for expecting return by investing your money in a riskier asset (real estate/equities) should yield atleast 5-6% in excess of the least risky Bank Fixed Deposits. Therefore the targeted return should be around 14-15% p.a with 7-8% net return after adjusting inflation & other taxes.
Having witnessed such huge rallies over the past few years in real estate even as high as 50-60%p.a in some areas keeps us wondering that whether we have we missed out on rally?? What these returns have typically done to investors is, raised their expectations which makes it even difficult for them to accept any return less than average 25-30%p.a. These are clearly aberrations therefore any asset class over a period of time attains its fair value and the returns look more reasonable. The same happened during stock market rally from 2005-2008 when everything looked so promising and even today in 2013 we haven’t revisited those highs yet.
Real estate as an asset class is unique it’s in own way. It’s a tangible asset class that’s productive and yields you dividend in the form of rent along with capital appreciation.
Land is a commodity that is limited and can’t be produced or multiplied. As the population grows so does the requirement of land and so on the prices depending on several other factors.
It will continue to make money for investors but the only question to ask yourself is about your expectation of the return!!!
originally published at synageconsultants.com