Not so fast, says ANUJ PURi, pointing out the different dimensions of both asset classes
As gold prices plummet, investors are asking if real estate will follow suit. Both are primary investment routes for retail investors in India. Although both asset classes depend on the same macro-economic factors, the correlation between the two is not as direct as might be assumed.
Price movements in the real estate sector are the result of supply and demand. This is true for gold as well, but the demand drivers for real estate are not the same as those for precious metals. In investment terms, they are both asset classes but there are some differences. First, the demand for residential property stems from a desire for home ownership that is hard-wired into the Indian psyche. Second, gold prices are not location-specific while real estate performs differently based on cities and areas. In fact, real estate valuations range from rational to irrational in different areas within the same cities, depending on supply, demand and investor activity.
There is no one-size-fits-all formula for the viability of residential real estate as investment. Different investors have varying levels of expertise, experience, and risk appetites. Just as people with insufficient expertise in stock trading are unlikely to see great RoIs from the stock market, investors without knowledge and research will fail in realty investment as well.
The three parameters for successful investment in any asset class are when to invest, how much to invest, and when to exit. Real estate comes with two more: where to invest and what size of land.
In the short term, residential real estate prices across cities will remain steady with minor upward or downward fluctuations. In the long term, they will rise again. The fundamentals look strong, with MNCs and investors continuing to see potential in the young, growing economy and its potential for job creation and renewed residential demand.
However, residential realty is definitely not for short-term investors. For opportunistic trading, gold is a far more suitable asset class, not least of all because it can be purchased in any quantity and is far more liquid. In contrast, existing and future regulations seek to subdue the appetite for speculation in real estate. Also, the lowest entry point here is definitely much higher than for gold. And finally, real estate requires a minimum incubation period in order to bring reasonable returns. Even after satisfying the basic investment criteria, you still need to stay invested for the middle to long term (three to five years) to garner best returns.