Equity vs Real Estate-Which one gives you better return?

Equity vs Real estate which one gives better return? This question and debate tend to happen between many investors many times.

Those who read my earlier articles about real estate investing in my blog may think that I am against real estate investment.

But I am not against real estate investment at all. I always try to tell you about the right investment in the right asset class at the right time.

After completing reading this article you will understand that I am not against real estate investment.

real estate vs equity

How most people analyze their investment return?

Most people analyze their investment return in the following manner.

They simply say that they have invested in Rs.3,00,000 in an asset class and their 3 lakh became 50 lakh in 24 years.

Wow, 3 lakh became 50 lakh in 24 years sounds great.

But, this kind of return analysis some times misleads you.

Let’s see an example of why it may mislead.

example of return with different time periods

Try to observe the above image.

An investment of Rs.1,00,000 made in Asset “A” became Rs.60,00,000 ( 60 lakh) in 26 years, and

while at the same time the investment of Rs.1,00,000 made in Asset Class “B” became Rs.50,00,000 ( 59 lakh)

in 24 years.

Now, Tell me out of Asset Class “A” and Asset Class “B” which has given better return?

Here, It will be difficult to tell which one has given a better return for most of you.

Moreover, I request all of you not to try to guess the right answer.

As guess will not be right always.

Then, How to know which one has given better return out or “A” and “B” asset classes?

Here, It can be done by using the formulae CAGR = (FV/PV) ^(1/N)-1

Cagr = Compounded annualized growth return.

Pv = Present value of the investment

Fv = Future value of the investment

N= Number of years investment made.

So, with the help of the above formulae, we can calculate the

return ( CAGR ) of both investments “A” and “B”.

Now, Let’s see the returns of “A” and “B” investments in the below image.

Investment returns in Asset Class A and Asset class B

If you see the above image, the investment made in Asset Class “A” is 17.06% and while

the investment made in Asset Class “B” has given 17.62%.

In addition, It is very clear that Asset Class “B” has more return than Asset Class “A”.

But we got this answer only after calculating the return on investment of Asset Class “A”

and Asset Class “B”.

Prior to calculating the returns. There is a lot of dialama about this.

So, It is very clear to analyze the investment performance calculating the

CAGR( return on investment) is a good idea instead of looking at only absolute

numbers.

Now, We can easily analyze the returns of real estate and equity which is our

article topic.

 

 

How much return that real estate investment has given in the past?

As it will be difficult to analyze real estate investment return in every area of our country.

Hence, I have decided to analyze my own city Kakinada ( Andhra Pradesh State) for this purpose.

I have selected a prime area of Kakinada main road (Commercial land) for this analysis.

Here, I should thank Mr. Murthy who is my BNI Dazzlers group, Kakinada who helped me in

gathering land values according to the registration office for the last 22 years.

The 1 square yard land as on 01-08-1998                =   4,000

and the same 1 sq yard land cost on 05-07-2019    =   60600

Number of years completed in this period are         =     21 years ( approx)

So, by using same CAGR formulae                         = (FV/PV)^(1/N)-1

we can calculate the 1 sq yard.

RETURN ON LAND INVESTMENT BASED ON GOVT REGISTRATION VALUES

 

If you see the above image, The return from commercial land investment at Kakinada main road for 21 years

is 13.82% according to the Government Registrar Office Records.

But, Wai the analysis of real estate investment return is not over yet.

Because people argue that if we calculate the return based on a market value basis, then the return will be around 25% to 30%.

Let’s calculate the return on market value basis also.

Here, In my city, 1 sq yard land value at Kakinada main road is Rs1,00,000 ( approx).

Now, Let’s see real estate investment return at Kakinada based on a market value basis.

market rate return of real estate investment at kakinada

If You see the above image you can find that return from a land investment based on the market rate

at Kakinada(Andhra Pradesh) is 16.57%.

Moreover, The real estate investment at Kakinada City has given a negative return all these 21 years.

What is the return of real estate investment at Hyderabad ( Prior to getting separated from Andhra Pradesh)?

I am not able to capture the image to showcase the land prices at Hyderabad.

But I am giving a link so that you can find the land prices at Hyderabad by clicking that link.

Click this link for the land prices at Hyderabad etc

Here, In the above link, you can see that the land prices at Hyderabad have fallen and gave

negative return for almost 15 years prior to the Telangana State Formation.

Hence, It is very clear that real estate investment not only can give a good return but also can

give a negative return.

In addition, You can see other cities returns on real estate investment with the help of above link last few years.

What is the return on investment of Equity (Sensex)? for the last 21 years?

Let’s see below image to know the Sensex return for last 21 years.

sensex cagr last 21 years

If you see above image, you can find that Sensex has given a “CAGR” of 12.72% only which is approximately  4% lesser than the Market Value return of commercial land investment at Main Road, Kakinada ( Andhra Pradesh).

But if you consider the Sensex Total Return. Sensex return for these 21 years is also around 16%.

The source for the above Sensex values is Yahoo Finance. Click this link to find.

What is Sensex Total Return?

Sensex consists of 30 shares ( stocks) always. These 30 stocks keep on changing as their performance keep changing and new stocks will replace existing ones.

This process happened a few times in these 21 years.

In addition, The stocks in the Sensex tend to give dividends sometimes.

In the above CAGR calculation of Sensex, the dividends given by the stocks in the Sensex not considered.

So, The actual Sensex “CAGR” is not 12.74%.  It should be much higher than 12.74%.

Here, In this article, I am not able to give exact CAGR based on Sensex total return (including stocks dividend).

But I am sure this is around 16% ( approx).

Here, Few people may start arguing that What about Satyam Scam, etc.

The above Sensex return in spite of all the scams that you are talking about.

Moreover, investing in Sensex with the help if Index funds or ETF”s is very easy nowadays.

What is the return of Mutual Fund equity Fund Schemes last 21 years?…

Observe Stellar performance by one of the schemes from Reliance Mutual Fund in below image.

reliance growth fund

If you see the above image, a mid-cap fund from reliance mutual fund has given a “CAGR” of 22% ( approximately).

Here, If you see 22% is much higher than a commercial land investment at Kakinada.

But I do not like to highlight this very much.

In addition, the category average “CAGR” of all mid-cap funds for the same period is 13% ( approx) which is also good.

So, after seeing the returns of the Sensex, Real Estate and Equity Mutual funds, we can understand these three investments have the capability to give more return than the inflation.

What about the risk in These Asset Classes Equity and Real Estate?

When it comes to investment always there will be a risk.

Both Real Estate and Equity risk.

Moreover, I agree that Equity investment has a higher risk than real estate investment.

But this high risk in Equity can be minimized with the help of diversification and asset allocation.

In addition, this kind of diversification and asset allocation is not easy to do in real estate for many of us.

As real estate demands lump sum investment at a time, and we can not invest in installments in real estate.

But at the same time in Equity, we can create wealth in installments.

Systematic Investment Plan is one such example of wealth creation in Equity in installments.

Conclusion about Real Estate Vs Equity investment in India?
  • First You should know Equity is also an Asset Class like Real Estate where you can invest bigger amounts into it.
  •  Real Estate also can give you negative returns like Equity ( Example Hyderabad, Mumbai, etc.).
  • Equity Investment has a higher risk than real estate but it can be decreased with diversification and asset allocation.
  • Sensex fell almost 60% in the 2008-2009 period.
  • You can not create wealth in real estate in installments. Read this article to know.
  • You can create wealth in installments in Paper assets( Financial Assets ) like equity.
  • Diversification is not possible with real estate investment for most of us. ( because it demands big lump sum amounts).
  • Finally, Every investment has its pros and cons. But Selecting the right investment at the right time will help you to be financially fit.

I am again repeating that I am not against real estate investment at all.

But My only concern is if there is no return or low return or negative return in your real estate investment in your invested time period. It may badly hurt you.

Hence, diversifying your investments across paper assets equity and fixed income makes a lot of sense.

In addition, middle-class people investing in real estate apart from own house is not advisable.

and, for rich people, they have to invest in real estate they have to invest according to their risk tolerance score only.

For example, an aggressive investor should not invest more than 30% of his income in real estate.

But it is not happening in India especially in the SouthIndia States like Andhra Pradesh and Telangana.

If we see Kakinada real estate return looks good but at the same time period if we see Hyderabad real estate return it does not look great.

Similarly, If we see last 20 years Sensex return, it is great. But if we consider a 60% fall in the 2008-2009, it looks scary.

Hence, It is very clear that both real estate and Sensex are capable of giving more return than inflation. But at the same time, they have risk in investment and our capital may erode when there is bad news.

In addition, there is no guarantee that Kakinada land prices will go up and up like previous years and Sensex will not see the 2008-2009 kind of fall.

So, It is wise to follow an asset allocation for our financial goals in order to decrease the risk in these risky asset classes.

Imp Note: People think of gifting real estate investment to their kids.  But do remember paper assets like equity also you can give your kids.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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