Bad times: Real estate returns are now lower than FD returns

Real estate investors swear by the returns they have earned by investing in homes over the years. But things have started to change in the recent past. In the last one year you would have earned a better rate of return if you had invested in a fixed deposit. In fact, you might even have done better by letting your money sit idle in a savings bank account. [caption id=“attachment_2236030” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] The real estate research and rating firm Liases Foras in a new research note on the residential market for the period of three months ending 31 March, 2015, presents some interesting data. The firm tracks six cities (or areas)–Mumbai Metropolitan Region, National Capital Region, Chennai, Bangalore, Hyderabad and Pune. As the report points out: “The average price of six cities remained stable from previous quarter.” So, on the whole property prices remained stable between December 2014 and March 2015. Prices in the Mumbai Metropolitan Region fell by 2.18 percent. Prices in Chennai, Hyderabad and National Capital Region remained flat. Prices in Bangalore and Pune went up by 1percent. In fact, between April 2014 and March 2015, prices have risen by just 1 percent on an average across the six cities that Liases Foras tracks. In Hyderabad and Pune prices went up by 7 percent. In Chennai the rise was 5 percent. In Mumbai Metropolitan Region prices went by 1 percent. In Bangalore prices were flat. And in the National Capital Region they fell by 2 percent. Data from other sources are also showing a similar trend. The Reserve Bank of India released an article titled Recent Trends in Residential Property Prices in India: An exploration using housing loan data on 7 May, 2015. As per the article the annual growth rate in the All-India Residential Property Price Index for the period October to December 2014 “slid below 4 percent”. “House price inflation in most of the cities witnessed its peak during the quarters of 2012-13,” the RBI article further adds. What this clearly tells us is that real estate investors would have been better of by putting their money in fixed deposits. In fact, in several cases they would have been better of putting their money even in a savings bank account, which generally pays 4 percent interest. These days there are several private sector banks which pay more than 4 percent on their savings bank account. Also, these returns unlike returns from investing in the real estate sector are assured returns. Now compare this to an era where investors were earning double digit returns every year. And since a good portion of this was in black it was even better. So as far as returns are concerned the real estate bubble clearly seems to have burst. And this is not surprising given the other data that Liases Foras has put out. The inventory of unsold homes as on 31 March, 2015, stands at 6.88 lakhs, up by 2.5 percent in comparison to December 2014. In fact, at an all India level the current level of unsold inventory of homes is at 39 months, which is the same as it was in December 2014. What this means is that if homes keep selling at the existing absorption rate it will take 39 months to sell all the homes that have been built and not sold. And that is huge. “A healthy market maintains 8 to 12 months of inventory,” the Liases Foras report points out. The current inventory levels are way above that. In the National Capital Region the inventory level is at 71 months, which means it will take nearly six years to sell off all the unsold homes. In the Mumbai Metropolitan Region, the inventory is 46 months. In Bangalore, Chennai and Hyderabad, it is at 27 months, 36 months and 28 months respectively. Only in Pune it is at a reasonable 18 months. This is not surprising given that average home prices are way beyond what people can afford to buy. In Mumbai, the average price of a home is Rs 1.3 crore. In Bangalore, it is Rs 86 lakh. And in the National Capital Region it is Rs 74 lakh. A February 2015 report brought by business lobby FICCI estimates that the number of dollar millionaires (i.e. with assets of Rs 6 crore or more) in India in 2014 stood at around 2.27 lakhs, up from 2.14 lakh in 2013. Compare this to the average home prices in cities and it becomes clear that these prices have gone way beyond what even the upper crest of the population can afford. Given this, it is not surprising that so many homes are unsold. Also, it is highly unlikely that the situation is going to change in the short term. The FICCI-Knight Frank Real Estate Sentiment Index for the period January to March 2015 states: “Stakeholders were bullish about residential sales post the general election in Q2 2014 [period between April and June 2014]. However, over a period of time, the increased sales did not materialise and as a result the sentiments collapsed. Merely 15 percent of the respondents expect the residential sales to be better in the coming six months.” Over and above this, there have been cases in the recent past where the builder has disappeared. There have also been cases where possession has been endlessly delayed. There are no mechanisms in place to deal with these situations and this leads to money being stuck with no asset coming into the investor kitty. Keeping these factors in mind, it is best to stay away from investing in real estate at this point of time. (Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)