Real estate versus stocks of realty companies: Which has better returns?

[ecis2016.org] We compare real estate versus real estate stocks, to understand which asset class offers better returns on investment, depending on the profile of the investor

When it comes to the purchase of a house for self-use, average home buyers tend to look at the functional aspects of the house. However, when it comes to investing in real estate for returns, many advisors are of the opinion that if one cannot afford to buy a piece of property, realty stocks are equally attractive. In an age of low returns and poor delivery by the unlisted developers, listed players are getting the lion’s share of the sales.

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While the second wave of the COVID-19 pandemic came as a big jolt for real estate companies across the country, the active investors on the bourses had an altogether different idea about the future of these real estate companies. It was, hence, no surprise that investors kept on buying the stocks of the real estate companies, making the valuations far more attractive. Most of the real estate stocks were in the green, while the business struggled with many issues, ranging from partial lockdowns to labour shortage and skyrocketing input costs, to the home buyers’ fear psychosis.

Nevertheless, seasoned investors generally foresee the future of the business far more clear than the average home buyers. During the first wave of Coronavirus pandemic, the stronger developers, mostly the listed ones, gained market share at the cost of unorganised developers. It is, hence, no surprise that the Nifty Realty Index that was at 280.0 in the first week of December 2020, jumped to 339.25 by the end of market closure on June 2, 2021.

The only change in the outlook of investors in realty stocks, has been with their choice of the portfolio. While commercial real estate and its by-product, REIT, was the preferred choice till recently, now, investors are betting on the stocks of residential real estate developers.

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In contrast, recovery in real estate has been subject to price discounts, stamp duty waivers, deferred payment plans and other support initiatives. This raises a fundamental question: should one shift focus to real estate stocks and REITs, rather than a piece of property that is highly illiquid and makes the investors overleveraged, as well?

Even for investors wary of stock market uncertainties, the India Volatility Index (VIX), often referred to as the ‘fear index’, has also cooled off drastically since March 2020. Fall of the VIX by about 69%, hints that fear and anxiety of future correction in stock markets are ebbing. The Volatility Index typically has an inverse correlation with benchmark indices.

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Real estate vs stocks

Subhankar Mitra, MD, advisory services at Colliers International India, agrees that in today’s context, property does not offer the returns (both, from rental yield or from capital gains perspective), as it used to about a decade ago. However, there remains interest for income-generating assets, such as offices, retail, industrial and warehousing, as well as for data centres. These sectors are primarily driven by institutional investors and HNIs with very little contribution from ordinary retail investors.

“India is already ripe for big-ticket investments. There are large foreign funds such as Blackstone, Brookfield, GIC, Ascendas CPPIB, etc. that have invested directly in select projects, as well as entered into platform level investments with large corporate developers of the country. Real estate attracted around Rs 43,780 crores in investment, in 2019. The retail segment attracted private equity investment of around USD 1 billion in 2019. Institutional investment in the sector stood at USD 712 million during the quarter-ended March 2020. Real estate attracted around USD 14 billion from foreign PE between 2015 and Q32019,” says Mitra.

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According to Amit Modi, director of ABA Corp, for most of the HNIs and UHNIs, real estate is the second asset class after stock markets, to park their investment. He maintains that even though the liquidity factor will always give an edge to stock markets, there is still a huge attraction for touch-and-feel assets like real estate, from a long-term perspective.

“Unlike a lot of developed markets around the world, real estate still remains an extremely localised tool of investment in India and an emotional one too. Multiple factors, including product strength, location, legacy, etc., determine the success or failure of each project. Even for a truly pan-national player, there is a high chance that the RoI from an investment in the company’s stock may be superseded by an investment made in one of its highly successful projects, simply due to its demand in a particular location. At the same time, the overall balance sheet and stock pricing may be shadowed by a couple of non-performing assets in a different region,” says Modi.

Advantages of investing in real estate

• Real estate is a tangible asset.
• It is not subject to extreme market fluctuations.
• Real estate could garner stable income.
• Interest level of institutional investors and PE funds indicate long-term growth potential for the property market.
• Real estate now offers the best potential for opportunistic, in terms of pricing.
• Low interest rates and waived or discounted stamp duty on real estate deals are lucrative for the investors.
• Real estate does not demand as much financial knowledge as investing in stocks.
• Mortgage funding or home loans are available for investment in real estate.
• One can avail of tax benefits by investing in real estate.

Advantages of real estate stocks

• It is more liquid in nature than buying a property.
• Realty stocks have given more returns in the post-COVID-19 era.
• Investors can enter the stock market with flexible investment.
• Investing in stock requires zero expenditure towards maintenance.
• Stocks have historically been unrelated with prolonged recession or the state of the economy.
• FIIs and DIIs who control 80% of the stock market are generally recession-proof.

As per pre-COVID-19 estimates, the real estate sector in India was expected to reach a market size of USD 1 trillion by 2030 and contribute 13% to the country’s GDP by 2025. Even if the Coronavirus has delayed this projection for a few years, it does not diminish the intrinsic potential of the sector.

For small retail investors, stocks and/or realty stocks may be better options, than investing in housing. Nevertheless, for large-ticket investors looking for long-term growth and sizeable returns, there are segments of real estate that are as attractive as any other investment option.

FAQ

(The writer is CEO, Track2Realty)

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