Monday, August 25, 2008

EQUITY V/S REAL ESTATE INVESTMENTS

Traditionally, Indian investors seem to prefer real estate over equity for their investments. I think the genesis of this attitude lies in the fact that equity markets are volatile and its fluctuations are available to investors on a real time basis. However real estate prices are also prone to severe cuts, though they are not so apparent in the short term and lack some of the advantages which equity investments have to offer:

Real Estate investments are necessarily made for the long term. Except speculators, no retail investor considers real estate for investment for a time horizon of less than 5 years. Now if the same attitude was displayed towards equities, investors would be a far happier lot. If investors bought fundamentally sound stocks and ignored their gyrations, I am sure that after 5 years, they would have made better returns on their investments than in realty. The problem is that we tend to evaluate stock market returns on a daily basis, while we give our real estate investments a far longer leash.

One can book partial profits in an equity investment if it has performed beyond expectations and still hold some stock for future profits. This flexibility is missing in realty investments. Due to this even if one feels that prices have moved ahead of fundamentals, one either has to sell the entire property or not at all. Also if funds need to be raised in an emergency, one can liquidate equity only to the extent required while retaining the balance.

An investor can invest in equity with relatively smaller amounts whereas in the case of realty it is often one of the largest holdings in one's portfolio. An investor can make use of scientifically proven methods like SIP/STP to build wealth bit by bit over the long term.

Liquidity is not an issue with equity investments (at least among the large cap companies). One can liquidate his investments fast and in a transparent manner, usually receiving the proceeds within 5 to 7 days. Anyone who has the experience of trying to sell a property will know the range of valuations bandied about and the innumerable people surveying the property before the transaction actually materialises.

Once purchased equities require no maintenance, while society outgoings are often extremely high , particularly in newer constructions in metro cities. To counter this real estate can yield returns if the property is let out, but advantage would be set off in future when the stock lending and borrowing mechanism becomes a reality, whereby investors would receive "rent" on their securities which they intend to hold for the long term. The dividend accruing on equities is yet another plus.

Tax breaks are often cited as being the rationale behind investing in residential property. But when the property is sold long term capital gains tax needs to be paid. Though there are no tax breaks at the time of investments in the case of equities, any gains from equities held for more than 1 year are completely tax free.

Of course, the above arguments are not valid for a person buying a property for residential or business use, but are intended to provoke a thought process in someone looking to buy property from a purely investment angle.

5 comments:

Uma said...

and some f*****g neighbour will also try to encroach on your land. Been there, done that! In fact my neighbours on both sides of my plot happily borrowed 5 inches each.

Mahendra Naik said...

Hi Uma,

It's nice to have your comments after a long time. You're right about the encroachment angle, which I had failed to mention in my post. Thanks for drawing my attention to it.

VALUE STOCKS UNDER TWO DOLLARS said...

Its best to have a little real estate and equities.

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