Should you bet on real estate or the Sensex?

They're just two different horses in the same race.

Real estate versus Sensex is an old debate. Both asset classes rise and fall with economic cycles. Both asset classes attract liquidity and are vulnerable to booms, busts and bubbles. And both asset classes have the potential to increase – and decrease – your wealth.

Unfortunately, both asset classes are also rife with ill-informed perceptions. Let’s explore two popular ones:

1. Real estate investment is safe because real estate prices never fall: 

There’s no data to prove this. India’s real estate industry has no benchmark like the Sensex for equity. There are no real-time prices in real estate, there are no derivatives to trade real estate. Residential and commercial real estate prices do not go up or down on a daily basis. You cannot, say, short a 3BHK in Bandra and the only way to go long is to buy the asset. You cannot place an order to sell a house and expect it to be sold in the matter of minutes. 

In the absence of any long-term data on real estate data, you’re left with anecdotal evidence – and there are enough stories from friends and families of how their home prices rose in value in the past decade. Most of these stories are true. Real estate in India has had an impressive run in the past decade. But that’s the past and it’s over. The RBI’s own Residential Property Price Index shows a slowdown since Q3FY13. If this slowdown persists or gets worse, real estate prices might actually fall. In the past – notably late 90s – there have been periods of downturn in the real estate market although no reliable data for these periods is available.  

2. Equities are risky:
The Sensex has never fallen on a 10yr, 15year and 20year basis. Ask yourself this: How ‘risky’ is an asset (The BSE Sensex) that has given a 17% compounded annual growth rate (CAGR) over 35years? How ‘risky’ is an asset that has delivered a huge 9-12% return over and above India’s average 5-8% inflation rate? 

Ironically, the equity market suffers from this ill-informed perception for exactly the same reasons that real estate is perceived as safe – liquidity and availability of real-time prices. There is a benchmark (Sensex) and there is a ticker scrolling every trading day on your TV screen. Prices go up and down on a daily basis. You can go long and short the Sensex and you don’t have to buy the underlying asset – simply trade in derivatives. 

Just like real estate, equity markets also move in cycles and the equity markets have seen deep, brutal cuts in the past – precisely because they are far more liquid than real estate. As I had mentioned in an earlier post, the above-mentioned long-term average of 17% cagr masks prolonged periods of dismal returns. 

So, what does all of this mean for you? Irrespective of asset class, there are two things to remember:

1. Define your risk and return:
Both asset classes – real estate and equity – can provide returns over the long term. But you need to be clear about your expectations and your risk appetite. Define them well and – most importantly – be realistic about your timeline for investment.
 

2. Identify opportunities:
There are mid-caps and small-cap stocks just like there are micro-markets in real estate. Downturns provide opportunities in almost any asset class. Do your homework well in identifying these opportunities. 

Interestingly enough, the real estate market (no data, anecdotal evidence) and the equity markets (Sensex) rose in tandem – from 2003 to 2008. The conditions today are similar to those back in 2003: interest rates are bottoming out, inflation is low and economic growth is slowly picking up. Unfortunately though, for real estate, supply is far higher than in 2003. No such problem in equity. No wonder then that net domestic inflows into equity mutual funds have picked up, while real estate is in doldrums.

Anupam Gupta is a Chartered Accountant and has worked in Institutional Equity Research since 2000, first as an analyst and now as a consultant.

He contributes to the Business Standard platform, Punditry, through his blog, Beyond Markets on markets & the economic horizons. 

He tweets as @b50