Real estate and real estate business stocks: Which one has higher returns?
Based on the profile of the investor, we compare real estate to real estate stocks to understand which asset class provides greater returns on investment.
Average homeowners prefer to look at the practical features of the house when it comes to buying of a house for self-use. However many advisors are of the view that if one cannot afford to purchase a piece of land, real estate stocks are equally appealing when it comes to investing in real estate for returns. The mentioned players are having the lion’s share of the revenue in an era of low returns and slow execution by the unlisted developers.
The Nifty Realty Index, which hit a low of 162.13 on May 19, 2020, has now risen to 280.0000 in the post-COVID-19 pandemonium (in the first week of December 2020). After the lows seen in March 2020, the BSE and the Nifty have both risen more than 50 percent, rendering the Indian stock exchange one of the best performers worldwide.
Shares of India’s only REIT, Embassy Office Park, which slipped to Rs 319 apiece, are back in the Rs 350 range and are predicted to cross Rs 400. There is also a development curve for the second REIT, Mindspace Business Park, which was over-subscribed 12.96 times in August 2020.
In comparison, premium discounts, stamp duty exemptions, deferred payment arrangements, and other assistance programs have been subject to recovery in real estate. This begs a basic question: does one move the emphasis to real estate stocks and REITs instead of a deeply illiquid piece of property that still makes investors overleveraged?
The India Volatility Index (VIX), also referred to as the ‘fear index’, has also cooled down dramatically since March 2020, also for investors who are wary of stock market uncertainty. Approximately 69 percent of the collapse of the VIX indicates that panic and uncertainty are ebbing in financial markets for a potential reversal. Typically, the Volatility Index has an opposite connection to benchmark indexes.
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Real estate in 2020 versus stocks
Subhankar Mitra, MD, advisory services at Colliers International India, acknowledges that property does not deliver returns (both from the perspective of rental yield or from the perspective of capital gains) in today’s sense, as it did around a decade earlier.
Interest exists, however in revenue-generating properties such as offices, stores, industrial and warehousing, as well as in data centers. With very little contribution from ordinary retail investors, these markets are largely powered by institutional investors and HNIs.
India is ripe for big-ticket projects now. Large international funds, such as Blackstone, Brookfield, GIC, Ascendas CPPIB, etc., have directly invested in select ventures and have entered into investments at the platform level with the country’s large corporate developers. In 2019, real estate attracted 43,780 crores in funding, around Rs.
In 2019, the retail market received roughly USD 1 billion in private equity funding. Institutional industry revenue during the financial year Ending march 2020 stood at USD 712 million. Between 2015 and Q32019, real estate attracted around USD 14 billion from international PE.
According to Amit Modi, director of ABA Corp, real estate is the second asset class after capital markets to park their investment for most of the HNIs and UHNIs. He insists that while the liquidity aspect will still give financial markets an advantage, there is also, from a long-term viewpoint, a significant appeal for touch-and-feel assets such as real estate.
Unlike many established markets around the world, real estate still remains a highly localized and emotional investment vehicle in India. The success or failure of each project is determined by several variables, including product power, venue, legacy, etc.
There is a strong risk even for a genuinely pan-national player that the RoI from an investment in the stock of the business will be replaced by an investment made in one of its highly profitable ventures, merely because of the demand in a specific area. At the same time, a couple of non-performing assets in a different area could shadow the overall balance sheet and stock pricing.
Advantages in real estate investments
Real estate is a commodity that is tangible.
It is not susceptible to extreme volatility in the economy.
Stable income may be generated by real estate.
The level of interest of institutional investors and PE funds demonstrates the long-term growth prospects of the real estate industry.
In terms of pricing, real estate currently provides the greatest opportunities for the opportunity.
For developers, low-interest rates and waived or reduced stamp duties on real estate transactions are profitable.
Real estate doesn’t need as much financial expertise as equity investing.
Mortgage lending or home loans are eligible for real estate purchases.
By investing in real estate, one can benefit from tax advantages.
Advantages of stocks of real estate
In nature, it is more fluid than purchasing a house.
In the post-COVID-19 era, realty stocks gave more returns.
With agile investing, investors can reach the capital market.
Investing in inventory calls for zero maintenance investment.
Historically, stocks have not been associated with a protracted recession or the state of the economy.
In general, the FIIs and DIIs that dominate 80% of the stock market are recession-proof.
The real estate sector in India is forecast to cross a market value of USD 1 trillion by 2030 and contribute 13 percent to the country’s GDP by 2025, according to pre-COVID-19 projections. And if, for a few years, the Coronavirus has postponed this prediction, it should not weaken the sector’s inherent potential.
Stocks and/or real estate inventories could be safer choices for small institutional buyers than investments in homes. Nevertheless, there are real estate segments that are as appealing as any other investment opportunity for large-ticket owners looking for long-term growth and sizeable returns.
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