Sunday, April 30, 2006

(Investing?) in Real Estate

Personally, I do not consider real estate as an avenue for investment. It can
be satisfy your consumption needs or speculative needs but not
investment appetite.

Apart from the list of reason you have given here are some more.

1. It is impossible to judge the present value and expected growth of
real estate using any sort of analysis. There is simply no information
available to appraise the worth of a piece of real estate.

2. There is no information available to evaluate the risks associated
with the real estate investment. The legal problems as you mentioned
pose an incalculable risk. Hence it is not possible to use any
benchmark to ascertain margin of safety.

3. I perfectly agree that the returns are over hyped. People tell me
so often that the land prices in this or that locality have became 5
times in 2 years. Well..I tell them that I can give names of hundreds
of stocks which have become 5 times. What does it prove? The very fact
that the land prices have gone up may cause further gains to be
limited. People think that the land prices will go up and up because
there is limited supply and increasing demand. The same argument
applies to oil, minerals or any other limited resource.
For those who think that the real estate never goes down
you can compare the rates in Connaught place, one of the prime
locations in delhi, with the rates prevailing in 1995-96. The rates
fell have fallen 40% when the corporate started moving out to Noida
and Gurgaon.

As an avenue for consumption real estate does provide significant
advantage, specially in metro's. You can save a lot of taxes and high
rents in housing properties. The other reason is that the real estate
and housing is an asset with zero or negative depreciation. No other
asset appreciate in value even while you use it. If you buy a house
and are living in it the hazards of illegal occupations are minimal.
Even here you got to ensure that you don't pay artificially high
prices based on expected further growth and buy clear land titles and
stay away from controversial properties.

Posted: Nov 16, 2004

No comments: