The debate as to which is a better investment opportunity – Real Estate or Equity, when one is looking for high returns, is one that continues. However, there are facts which clearly establish superiority of Real Estate investment over equity investments. One of the most important reason in support of it, is the lesser volatility of prices associated with RE prices. You could not be away from the market, if you have made equity investments, while you don’t check land prices every day and do it only when you need to sell.
One point repeatedly put forward by Equity enthusiasts is that real estate is lumpy and illiquid. But what these people miss out is that wealth generation is not a target to be achieved in a few months or a year. It is meant to help achieve life goals over 10-15 years. Also, real estate generates supplementary cash flows in the form of rental income, which is almost always better than the dividend income one can expect from equity investments.
The nature of equity investments is such that the investor could never predict the facts of how his investments would perform over a longer time frame. Look at what happened in the case of a yes bank or a Reliance power. People lost almost entire invested amounts due to wrong disclosures by directors of these corporates. On the other hand, a real estate investment has a material value that can be ascertained by anyone to a great degree of certainty. This ensures that the best analyst and the worst in case of land price will differ only by a few percentage points, while in case of equity, this difference could be in 10s of percentage.
A certain group also propels equity investments through mutual funds investment. Agreed, that mutual funds avoid the risk of volatility in only one scrip, but the volatility is still much higher than Real Estate. Also, analyzed over a long period of time, mutual funds have also not been great wealth creators. And if they don’t serve this purpose, they lose the right to be compared with real estate investment, which has helped people across India to create wealth over years.
Another factor that supports real estate investments is the ability of an individual to get funded at a highly subsidized interest rates by taking a home loan, to buy a property. Can you get a loan to buy into equity? The fact that one can fund the real estate investments through a loan results in taking benefits of higher than calculated returns. If the price increase in property has been more than the rate of interest on loan (which generally is the case), one earns returns also on that part of investment that was done through home loan money.
However, it is to be understood that the property should never be used as a short-term investment tool. And one could argue in favor of an equity investment for short term. Finally, the tax advantage offered on housing loan both on the principal and interest amounts make the returns even sweeter and therefore, property should always be a part of your investment portfolio.