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  • Writer's pictureSahastha

Real Estate is riskier than stock market

Updated: Oct 4, 2023

Real estate market is at boom, property prices are at all time high, demand is going up and people are making loads of money by investing peanuts. I assume, you must have heard all this before you bought a flat which is 10 times more than your net worth, probably squeeze your cashflow so tight that saving for other goals is impossible and makes you completely vulnerable to the changes in socio-economic factors.

Migrating

I am continuously telling my clients that migration is ignored when you purchase a asset which is fixed and illiquid. You won’t be able to take it with you, won’t be able to maintain it and liquidating it can be the hardest thing you have to sell even if you are top salesman in your area. Let’s focus on why migration is such a big topic here

Migration within the city This is a real life example. One of my client works for Flipkart who used to have their office in Koramangala. So, he bought a flat near to the office and after few years Flipkart changed their office near to ORR, extending his commute in Bengaluru traffic. So after sometime he called me up and told me that he is looking to buy a property near to the new office. We had multiple conversation and finally decide to rent the flat in the same community he was thinking of investing. Now he is happy with Koramangala flat as flat value has apricated from 80 lakhs to 1.2cr (subject to saleability) in 4 years and rental yield is 4%. Flat he wanted to buy near new office would have costed him sweet 2.5cr, while he managed to get the same flat on rent in just 55k yielding the owner 2.64%. Owner might be paying 7-8% interest on his home loan and big chunk of his liquidity is already locked under the mid-high value property which will take the worst hit in the bad economic environment. I consider him lucky as I have other data of different clients, where there are barely covering the cost trying to sell the flat to reduce the EMI burden while they bought a second flat near to office location. I am giving you a good example so you can collect some example near to you and see how people are averaging in last 5 years.

Migration outside the city This can happen due to lots of factors. One big factor we are seeing right now is Covid19 and uncertainty over cubicle life of employees as more and more companies are trying to bring the work from home culture either permanently or thinking about it. I have multiple examples from my clients who have shifted temporarily to their hometown in Kolkata or Kanpur due to offices shut down till next year. They are maintaining their flat in metros while living with their parents or family in their hometown. Kanpur is a decent city with decent schools with much lesser cost of living than metros and if, his company allows him to work from home for a significant part of the year, he is ready to pack the bag and move permanently to Kanpur. He and others can do easily cause they are just renting. It’s not a easy decision for person who has invested probably 5-10 years of his income in the house at his working city. Other reasons to migrate could be pollution, water problem, better opportunity at a different city, family issues etc. Pollution and water problem might not be as big of a issue yet but more people will migrate because of these two issues in future than all the other factors combined.

Migration outside the country People do migrate to other countries for host of different reasons. Making the existing real estate investment harder to manage, harder to find a tenant each time an old one left and even harder to sell. There should be some lucrative reason to hold on to a property which is illiquid and yielding lowest return possible on the largest investment in your portfolio.

Unreasonable expectations Real estate specially in India is highly overvalued, over stocked and politically induced by artificial inflation. Pre-pandemic, my working base was in Hyderabad but Now I want to stay near to my parents until this pandemic threat is over. So, I decided to live in my hometown (Alwar) in Rajasthan. It’s a average small city with very low average per capita spending. To give you an example, we only have 1 multiplex with 2 screens while 3-4 single screen theatre closed in last decade. No MacD, no Haldiram, no Shoppers stop or Central. Mostly because people don’t have income level to sustain this kind of lifestyle hence, big brands doesn’t come often. Now take the case of real estate in such a city. A 2500 sqft villa in decent society cost 2-3cr, while rent for the same villa will be 20-30k maximum. Yielding merely 1.2% on a 2.5cr real estate property. Now this is not acceptable to many people hoarding the multiple properties across the city. So what they can do? They will demolish the house and construct a 2-3 story commercial property and ask rent which is unheard of. We can write a book on how to destroy a local economy by artificially inflating the property prices, making it unaffordable for larger part of the society. Keeping rent so unreasonable so a new business won’t survive with the burden of fixed cost over their shoulders. At the end even with artificially inflated price and highest ever possible commercial yield, a honest investor will be facing months of waiting for the property to be occupied, uncertainty over the rent collection and a headache to manage the commercial property which is far worse than managing a flat. My office in Hyderabad is closed which was at a two story commercial building in Kukatpally. Entire building is empty and owner still need to pay the EMI for loan taken to construct the building.

Liquidity Due to some unforeseen reason one guy left his job to take care of his daughter. He doesn’t have any recurring income nor any investment left as he repaid the entire home loan he took for a flat where he doesn’t want to live anymore nor can sell anymore, leaving him with just rental income, forcing him to sell his ancestral house to take care of day to day expenses with daughter’s schooling. He approached me to manage the liquidation proceeding from the property and arrange a monthly income from that lumpsum. It’s been 3 years and many lakhs reduced from original asking price, he is still looking for buyers. Things might not be as worse as this example but you can see few around you. I am not even talking about the money stuck in properties under litigation.

Note: People will still buy (real estate) what they have to and the biggest reason is society/family pressure. Just read this article to someone who is about to commit 70% of his/her income in EMI just to please few people around him making him vulnerable to all sort of factors which might destroy/hamper his/her financial life.

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