Category Archives: Real Estate

Is your Investment in Real Estate and Gold Safe?

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Warm Greetings from PenguWIN:

            The crux of this article is about the volatility in asset classes, physical and financial with specific reference to Real Estate, Gold and Equity investing, more specifically Equity MFs

Investors who started investing in equity funds since 2017 and seen the value go up and up, will probably be a little impatient, experiencing the 2000+ points correction in Sensex in the recent past and the associated high level of volatility. I make sure that I tell this to all our clients (at times more than once), that Equity funds are long-term investment products and needs to be looked at only for 5+ years, more the better. There may be a few who are lucky to enter the market when it was low, make money and exited before the fall. Even these people will fail if they try to replicate it for the second time. But, accepting the reality is always difficult.

Let me take couple of my favourite examples.

Let’s assume that a person buys an apartment in Adyar/Besant Nagar area. A 1000 sqft 2 BHK (basic price of 16,000/Sq. Ft.) will set him back by 2 crores, including registration, car park, corpus fund, club fees, EB, water, sewer etc. Once he takes possession of the apartment and moves in, within a couple of months, let’s say there is a slump in the RE (Real Estate) market and basic price drops to 15,000/- per Sq. ft. The investor will feel bad as his Networth has gone down by 10 Lakhs. On the other side, if the price increases to 18,000/- sq. ft, he feels happy that he has got a good deal, saving 20 Lakhs. Whether it is a question of 10L loss or 20L gain, there will no action of purchase/sale of the house as its notional and he has to live in the house. The value matters when he moves to a different place within or outside the country and decides to sell it or when he bequeaths the property to his children and they decide to sell it.

The same holds good when people buy gold jewellery or even coins. Gold has lost about 35% of its value since 2012 (35% is the consumer price Inflation) and the current price in INR is lower than the Sep/Oct 2012 price which was Rs. 3000/- plus. Several people have asked me this question – Is it a good time to buy gold? No one has asked me if it was time to sell gold. The worst thing is if its close friends or relatives and you tell them the facts of Gold (inflation hedge, intrinsic value and so on) which may be negative at that particular time, they feel that this guy is keen to drive Goddess Lakshmi away from our house.

Though many of the investors I encounter, have significant allocation to RE and Gold, they don’t get perturbed due to changes in price while even minor changes to stock markets (going down) is something that makes them anxious as they can easily relate numbers. So, even if the investor buys a fund for 1 lakh, that turns out to 1.25L in a year, the subsequent fall to say 1.1L is apparent as the mind relates to only the 1.25L figure, forgetting that the original investment of 1L.

Equity investing is for the long term (may not be that long as in the case of RE) and our patience will be tested by the market similar to RE and Gold, more severe at times. Some are unable to digest the volatility, especially people who have invested for short term that is just 1/2/3 years, going by the healthy returns of 2017. They tend to think that if 2017 has given 30% returns, then our investment should be able to fetch atleast 24% or 12% per year, in 2 years (fair assumption from their perspective). There are others who get excited by the returns that their friends and family members have made and move huge money to equity funds (Big Bang Investing), in a matter of few days, trying to make up for opportunity loss.

Whether 2018 or 2019 turns out to be as rewarding like 2017 (I will also be delighted to see my portfolio go up further), a time horizon of more than 5 years, higher the better, will definitely reward us with good returns and will continue to be the asset class that will provide the best returns.

People who hold less than 100% equity portfolios – Balanced Funds, Equity Savings, MIP can expect stability of returns in less than 5 years, approx. 3 to 4 years

What is the basis for my confidence? Equity market growth is a reflection of how the economy (GDP) does in the country, growth of companies in revenue and profitability, increase in consumption, increase in per capita income. The scepticism that prevailed in the market for the past few quarters is attributed to some of these indicators, not in green, while the markets were scaling new peaks. However, the Dec 2017, Q3, results have been positive and analysts expect that this momentum will continue in the coming quarters. Excluding the troubled Banking and Financial Services sector, Net Profit of a sample of 2043 companies rose to a six-quarter high of 27.5%, Net Sales by 11.5% YoY. We practice what we preach and your money is in safe hands.

We will only do with your money what we do with our won – Warren Buffett


<Blog # PenguWIN 1058 – Is your Investment in Real Estate and Gold Safe ! >          

Right Time to buy your Home

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Dear Friends,

Nowadays you can observe that graduates just out of college, joining some big companies with fat pay packages, immediately investing in a home. This is one of the reasons for the housing prices to increase steeply in NCR, Chennai and Pune. Among all cities in India, Chennai seem to have appreciated the maximum according to Residex (National Housing Bank’s index for tracking prices of residential properties. The prices in some of key locations are given below with 100 as the baseline value in 2007.  These are location averages and within the location there would be price variation. For example in Chennai city, Anna Nagar and Kilpauk are   at 748 as per the latest published value (Mar 2015) while Adyar and Mylapore are at 430.

Location Residex Value as on Mar 2015
Delhi 190
Mumbai 238
Kolkata 212
Chennai 364
Bangalore 115
Hyderabad 97
Pune 251

Is deciding the home immediately after taking up a job, the right move?

The person might not have even be married and also does not have a clue of his family size (kids).So, whether it’s a 1 BHK or 2 BHK or more is a tough decision to make. Assuming that he has 2 kids, if the person has bought 2 BHK flat, it might  turn out to be insufficient for the family once the kids grow up and prefer individual rooms for themselves (I am personally experiencing this:)

The person tends to think of a home in terms of his current salary. So, a person earning 25K per month (net ) will be able to get a loan of only 60 times or 15 lakhs (or 85% of the value of the property with monthly EMI not exceeding 40% of net salary). Based on the loan eligibility you tend would go in for a smaller home or one at a remote location, away from the city center.

Is the place where you have bought the property, the home that you would settle?  Many people migrate from one city to another or a foreign location as part of their job.

The commuting distance from children’s school and office needs to be taken into account. 

Among Real Estate as an Asset Class, investment in an Apartment provides the least ROI. Independent house is the next and maximum returns are from Land (Risk is least in an Apartment followed by independent house and land (encroachment issue)). There could be slight variations to this depending on the location, builder etc. So, buying an apartment to let out and earn income is not a wise decision (Annual rental values in India are typically around 1.5% to 3% of Apartment price).

So what is the ideal time for buying a home?

The right time in my opinion would be when the person is in mid to late 30’s, married and have decided on the number of kids. Typically the salary would have reached a significant level and you can afford to buy a spacious dwelling. This is the time when the kids go to school and most of you would have decided on the final location to sette.

Use the period until mid to late 30’s (10 plus years) to accumulate wealth by investing in growth oriented Mutual funds. This will come in handy when you have to make the down payment of your home.

One might ask, can I invest in a house (please refer to dictionary for the difference between a house and home:) until then? I would say that is not a wise investment as the income from letting a property is low and house as a physical asset cannot be liquidated easily.

People looking to buy a residential property in Chennai need to be extra cautious as the prices have risen steeply from 2007 and reached very high levels. Looking for big capital appreciation (like past 8 years) from this price point is difficult. 

 <Blog # PenguWIN 1036 – Right time to buy a house>

Allure for Real Estate

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Dear Friends,

                       A very good day to all of you on this precious day, our beloved Mahatma’s Birthday!

 I received several requests from investors and well-wishers to share my views on real estate investments and I thought that I will share my views on this topic.

Indians are passionate when it comes to purchasing physical assets, especially gold and real estate and hence these 2 asset classes form a considerable portion of ones portfolio of investments. Real Estates have a psychological impact on investors and the pleasure of owning properties have resulted in some investors accumulating very high proportions of this asset as part of their overall portfolio. I have met several investors who have over 80% of their assets just in real estate as there is a myth that real estate investments always make huge returns and they have produced several “Crorepatis”.

I personally have quite an amount of experience with Real Estate investments – Land, Independent House and Apartments but haven’t dealt with Commercial property. Very few individual investors invest directly in Commercial Real Estate and hence I am not getting into the details of it.

Among Land, Independent House (house with full share of land ownership unlike apartments where the ownership is on undivided share) and Apartments, the return potential is maximum for residential land, followed by independent house and apartments/ flats. The risks are also stacked in a similar way – highest for residential land and lowest for flats. i.e. Investments in Flats and Independent houses are relatively safer when compared to Land investments. Land investments needs thorough due-diligence as there are several horror stories of the same property being sold to multiple buyers by fabricating documents and the checks and balances in the registrar’s office is below par. Also, usurping of land by local influential people is also quite common.

Real Estate as an asset class suffers from huge black money or unaccounted money transactions and the difference between the guideline value and actual market value is quite significant (excess of 100% in several areas). This is more pronounced in land deals and independent houses and to an extent controlled in flats/apartments. For salaried people it is not uncommon to convert their hard earned money to black money (during purchase) as the seller most of the times is not inclined to take more than the guideline value due to capital gains tax incidence. There are cases where the buyers also try to limit the white component to only the guideline value in order to save on stamp duty and registration charges (8% of sale consideration in Tamilnadu). In my view this huge unaccounted money that moves from one person to another is one of the key reasons why the real estate prices have reached astronomical figures in India.

In Adyar, Chennai, the cost of a 2 bed-room flat of size 1000 sq. ft. is priced at 16,000/- to 18,000/- per sq.ft. Including registration, taxes, car park, corpus, water and sewerage and basic furnishing the landed cost is approx. 2 crores. This is an alarming number and I am not sure how many people can really afford such properties. Compared to this the prices in US where the income levels are significantly higher seem to be very cheap. One of my friends recently bought a 4 bed room independent house (about 2500 sq. ft. constructed area) with 2 car parks, garden etc. for $260,000/- in a prime area in Dallas, Texas. This works out to only 1.55 crores. A similar set-up in Adyar (where 2400 sq.ft. of land costs about 6 crores) would cost anywhere between 12 to 15 crores. Trying to compare real estate investment in Adyar and Dallas is definitely comparing apples and oranges but the point I am trying to emphasis is the affordability factor of Real Estate in prime locations in India.

I would like to illustrate the example of my own investment in Real Estate and its performance now. The flat that I live in Adyar is 1150 sq.ft, 2 bed room flat, purchased in 2002 when the rate was only about 1800/- per sq.ft (before the mega real estate boom in Chennai). Including car park, registration and others I spent about 30 lakhs by the time I took the possession in Aug 2004. The flat is about 10 years old now and I checked the market value (I don’t plan to sell it though) for the purpose of this blog. Based on the going rate and the depreciation the price would be about 12,000/- per sq.ft (or 1.38 crores for 1150 Sq.ft.). The gains is not a simple math of 1.38 crores minus 30 lakhs resulting in 1.08 crores. I would have earned rental returns if I had let it out which was around 9,000/- in 2004 and approx. 25,000/- now. Assuming 25% as maintenance expenses, 9% investment returns from the rent and the taxes that I would have paid on rents received, the sum works out to 16.13 lakhs. If I sell the flat I have to pay Capital Gains Tax which I calculated and works to about 14.33 lakhs (the indexed cost of the 30 lakhs taking the cost of inflation index published by the government of India is 66.35 lakhs and 20% taxation on the net gains works to 14.33 lakhs). I had taken 20 lakhs bank loan resulting in considerable interest charges but I am ignoring it for this calculation for a reason. I would have to pay 2% brokerage when I sell the property and including all these the net value of the property comes to approx. 137.5 lakhs giving me a Return on Investment (ROI) of 14.15%. The caveat here is that I would be able to find a buyer who will pay me 138 lakhs in white (The buyer would have to pay 1.38 Crores plus 8% registration and stamp duty and brokerage making it atleast 1.52 Crores) and no unaccounted money which is rarity.

I tried to compare this with investments in some well-known equity mutual funds and the results were quite interesting.

Scheme/Index NAV on 1 Apr 2003 NAV on 26 Sep 2014 Returns Value of 30L
Franklin Blue Chip 23.0826 315.5640 25.55% ₹ 410,13,230
Franklin Prima Plus 23.1948 373.1597 27.34% ₹ 482,64,227
HDFC Equity 23.4600 440.1260 29.05% ₹ 578,15,463
HDFC Top 200 17.4726 322.7530 28.88% ₹ 554,15,851
ICICI Pru Dynamic 10.3442 177.0158 28.02% ₹ 511,79,375
Reliance Growth 30.1308 699.5247 31.46% ₹ 696,48,801
UTI Equity 9.0600 91.4349 22.27% ₹ 302,76,457
Sensex 3,080.9500 26,626.0000 20.64% ₹ 259,26,419
BSE 100 878.8800 8,021.0000 21.21% ₹ 273,79,165

You would notice that even investing in Sensex would have given me 1.2 Crores more than my flat and there is no challenge of black or unaccounted money. I don’t need to go around hunting for the right buyer and there are several such advantages.

Let me now illustrate another example of a property transaction, a flat in Velachery (prime location and from a premium builder) which was bought for 65 lakhs (925 sq.ft. 2 bed room) in Feb 2012. Two and half years later the situation is that the value of the flat is not more than 70 lakhs as the prevailing rate is only about 8000/- per sq.ft. and since the property is 2 years old, the value per sq. ft. would be approximately 7250/-. When you buy a new flat you are quoted only the base price and the additions like registration, car park, corpus etc. works out to another 10 to 20%. When you sell it this gets discounted. The registration has to be done for the entire sale consideration (8% of 70 lakhs vs 8% of 15 lakhs, which is the cost of Undivided Share) and not just the undivided share (UDS), which is an advantage if you are buying a new flat. So, the second hand buyer discounts the price to that extent. If we calculate the rentals received for 2 years and deduct the maintenance and taxes, the value would go up by another 1.5 lakhs which probably would be lost in brokerage which has to be paid to sell. The principal amount of 65 lakhs with a simple interest yield of 9% itself comes to about 77 lakhs which means there is a notional loss of 7 Lakhs on this real estate investment!

So, the point is that you don’t always make money or profits in real estate investment and it has its own risks. People may argue that if this property investment is held for a longer period of time, the losses can be recouped and some gains can be made. This holds good even for Equities which is riskier for periods of 3 years and less while the risk reduces considerably beyond 3 years and upwards, making it safe as a long term asset class.

 To summarize my views:

  • Real Estate as an asset class gives a comfort feel to people. But the percentage exposure should be appropriate in one’s overall asset allocation. Returns from real estate do beat inflation in the long run.
  • Real estate investments are marred by liquidity concerns, black money and usurping
  • It’s a myth that real estate investments are safe and always give positive returns    
  • Ensure that your real estate investment is accessible to you on a regular basis or there is a trusted care taker for the same.
  • If you are not comfortable dealing with black money, restrict your exposure to real estate, possibly just your home to live.


REITS (Real Estate Investment Trusts) is another way to take exposure to Real Estates and SEBI had just released the guidelines. The minimum investment amount is about 2 lakhs per investor and REIT is similar to a Mutual Fund. Please remember that REITs are mainly focused on commercial properties and their main income would be from commercial rentals. 80% of the REITs should be investment in completed properties and only the rest 20% can be in land and other assets. REITs are expected to hit the market shortly and I will get into more details of it at a later point in time

Please do send me your comments to and share your views on my blog. I would also request you to send me some interesting topics that you want me to blog on and if it’s an area of my expertise, I will definitely take it up

<Blog # PenguWIN 1014 – Allure for Real Estate>

Category: Real Estate