Rental yields on homes are abysmally low. And at a time when the economy is sluggish, many ponder whether selling a second home and investing the sum elsewhere might prove beneficial. The case for such a move would be driven by an expectation that capital values will fall so that rental yields improve. The argument against it would be that yields would rise again as the economy gathers steam. It is anybody’s guess which way the pendulum will swing, but it is prudent to take a more studied view to guide such a decision.
Going by the track record of returns across asset classes over the past 5-7 years, equities and gold are the only other investment avenues that offer returns comparable to real estate. But a switch to one of these options can cause greater anxiety—given the high level of daily volatility in their prices.
Selling a property for a hefty few crores of rupees and earning a healthy return on the realised sum may seem attractive as an option vis-a-vis the rental yields on offer on many housing properties of about 0.25% a month (4% per year). However, the big boost that has been delivered by real estate through capital appreciation over the past many years more than compensates for the dismal yield. Appreciation in realty value is believed to have ranged between 10-15% over the past five years in most urban Indian markets. In comparison, the returns on investments in gold and equities (using the S&P-BSE Sensex as a benchmark) have been near 16% and 17% per annum, respectively, over the same period.
While the absolute point-to-point numbers for gold and equities might make them appear more attractive, the high level of variation in their prices over the period highlights the risk of vastly different returns for investors entering and exiting at various points of time. Price trends in real estate tend to be far less volatile. Besides, if you throw in rental yields for a ready-to-live-in house, another 4-5% gets added to the kitty. Then there’s the possibility of leverage. If you buy a house with a loan that comes at near 10.4% interest rate today, your asset value swells. For example, with 80% finance you can buy a house worth Rs 25,00,000 by investing just Rs 500,000. The capital gains from such leverage even after assuming that 100% of EMI is interest cost makes such an investment attractive. In fact, in a scenario of good realty market returns, the value generated through such an investment can be many times the returns from comparable asset classes.
But there are no free lunches. Investing Rs 500,000 in gold or equities does not require incremental cash outflows. Servicing a home loan does. If you can manage to continue paying out a fixed sum every month to service a loan, investing or staying invested in realty might be a good idea.
Formerly Editor, Outlook Business and Executive Editor, NDTV-Profit, the writer is now an entrepreneur and takes keen interest in personal finance. Contact him at hinduhabitat@gmail.com
