Should one Buy real estate or shares of real estate companies? Which is better option?
Sometime last year, a message was circulating on social media suggesting that had someone bought shares of Eicher in 2007 instead of buying Royal Enfield bike (manufactured by Eicher) with the same amount, one would have made enough money to buy a BMW car 10 years later. On a similar line, I can recollect my conversation with my friend about 20 years back. I was having coffee at the Sea Lounge at The Taj Hotel – Gateway of India. I offered my friend, who was passing by, a cup of coffee. He smiled and jokingly said, ‘Instead of buying me coffee, please give me one share of Indian Hotels-the company that owns the Taj Hotel’. At that time, the price of coffee and the price of Indian Hotels share were almost the same. I am not sure that he would have been better off now as Indian Hotels share price did not move up as much as was expected in the last 20 years or so.
Very recently, I read an interview of Marc Faber in one of the leading business newspapers where Marc Faber had opined that Indian real estate sector will do well. Let me reproduce what he said, “I would focus on investments in real estate because India is in the early stages of economic development and not in every sector, but in many sectors, it is in the early stages of building a very large middle class and then it becomes attractive to own a home. The first residence, whether that is nearby Delhi or in Delhi or Mumbai or wherever. And then the second thing is that these aspiring millennials and young people who have money want a second home, they want maybe a condo on the beach or they want a house for weekends, so forth. So, I think that real estate in India is still in the infant stage of economic development if you compare it to other countries”.
A thought came to my mind. Should one apply the same logic of Eicher and instead of buying real estate, invest the same amount of money to buy shares of listed real estate companies? Would this strategy be as successful as Eicher or would it go kaput like Indian Hotels? Will postponement of buying 2BHK flat in one of the distant suburbs of Mumbai now and using that money to buy shares of real estate companies help buy a penthouse after 10 years in one of the posh localities in Mumbai?
To be sure, Marc Faber’s logic was valid even 10 years back as India was growing with more and more people moving to cities for better prospects. The rising urbanisation, coupled with better standard of living, pushed up the demand for real estate. In the last 10 years or so, many real estate companies went public and offered many opportunities to put this strategy of buying shares of real estate companies instead of real estate into practice.
I started doing research on this and the result was surprising. Let me start with DLF – India’s most valuable real estate company. DLF tapped the market in June 2007 and generated enough heat at that time. At one point of time, there was news that it would be India’s most valuable company, even surpassing Reliance Industries. After more than a decade since listing, it is trading at 66 percent discount to its IPO price! Clearly, buying real estate from DLF would have been much better than buying its shares. But one company’s example does not depict a trend. That forced me to look at share price performance of some more companies.
The second most valuable company is Oberoi Realty, which went public in January 2013 at a price of Rs 260. Today, after almost six years, its share price is up by 73.5 per cent—offering CAGR of less than 10 per cent. Despite the real estate prices being subdued presently, I am sure that the price of the flat constructed by Oberoi would have given better returns than the appreciation in its share price.
Most of the real estate companies, as one can see in the table below, failed to live up to the shareholders’ expectations. Some of the old listed real estate companies have performed the worst, including D S Kulkarni, which stands suspended, and Ansal Housing, which has under-performed big time.
I would say that the listed real estate companies created huge amount of wealth destruction for the investors, because even while the stock market went up, the share prices of these companies went down. They did not give any meaningful returns to the investors over the long term. Many of them are not investor-friendly too as they have rarely declared dividend or bonus. Also, time and again, the issue of corporate governance keeps cropping up.
Only one company that stood out among the lot is Godrej Properties, which is up by 173 percent since its IPO in December 2009. But that’s an exception. Indiabulls Real Estate offered some hope, but in the last 12 months, its share price is down by 60 per cent.
Based on this, I have come to the conclusion that between the two choices, one should buy real estate instead of buying shares of real estate companies. I would also recommend buying ready-to-move-in real estate.
Having said that, I am not sure whether as an asset class real estate will do well. It has been observed in the past that real estate did not do well in terms of price appreciation when there was non-Congress government at the Centre. If Modi government gets re-elected, the trend of under-performance may get extended further.
There is another change happening that is not good for the long term growth trajectory of the real estate. Today’s generation is not very keen to buy real estate. It is no longer a priority for them. Job-hopping within the country, and sometimes on foreign shores, reduces the need for owning real estate. For them, staying on lease rental is a preferred option. When things like taking furniture on rent is gaining popularity, I doubt that the new generation would like to commit big money for real estate. Technology is another game-changer that would make travelling faster, helping people stay long distances and yet reach office on time. Cheap data and advancement in technology like AI would reduce the need for physical presence in the office. All in all, there are headwinds that may not allow real estate as an asset class to do well.
So, with due respect, I beg to differ with Marc Faber’s assessment. Buy real estate only if you wish to use it for self-use. For investment, there are better options available.
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