A lot of people who read my blog think I am against real estate. Far from it. I believe a lot of money can be made in real estate – surely greater than gold and debt instruments. Surely less than a nice portfolio of equities.

However to make money in real estate the following conditions should exist:

– you have to be really big enough to influence policies, take delivery, buy land build houses and then sell, …- which means it is a BUSINESS opportunity, not just a buy and hold or buy and rent kind of business.

– Builders, lenders, etc. will of course make the ‘lion’s share’ of the property appreciation.

– I would love to buy a portfolio of offices, houses, clubs, theaters, malls, shops, hotels, gym. However this kind of a portfolio is possible only if REIT was to be introduced.

– I would love to invest in a fund which has a portfolio of all the above and allows me to invest money on a monthly SIP – where I should also get the benefit of price fluctuation.

– the fund itself should be leveraged, so that I do not have to leverage. However if the fund is not leveraged, I should have money available to leverage and buy more units.

Will all this happen?

NO. NOT in the current way that things are. Here is a nice real life incident:

One very huge fund manager did a small experiment. He called 3 valuation companies and asked them to prepare a valuation report on one property in a tier 2 city. He got a variation of 20% between the highest and the lowest valuation.

Then he sent 3 valuation experts from MUMBAI to do the same job….

He told one of them…he ‘likes the place’ and wants to buy

He told one of them…a friend is in trouble and he wishes to help him by giving a loan

He told the 3rd guy – I wish to sell the place.

He got a 25% variation and the bias was also captured in the price!

No REIT cannot happen until the back end is cleaned up. Look at the share market the price discovery mechanism and trade execution are both very good and in place for a long time..

The real estate back end is in real bad shape ….so REIT cannot come to India in a quick time frame.

So what to do? In my case, I stay away. Because the best thing to do in a bubble is to stay away.

Why is it a bubble in Mumbai? Because there is no one person capturing all the events in an index, rents are no where near the bank interest rates….all these are scary…so my defense is ‘stay away’ beyond the one house required to live in.

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  1. Fully agree with you, not that you care to know it. The same situation is in Chennai too. A client of mine wanted to buy a property (in a prominent locality) for letting out. The rental yield works out of 1.6%

    How this kind of inefficiency is possible in real estate market is what I’m unable to understand. So I’ve given up, unless an enlightened soul like you can unravel the mystery.

  2. Agree. I always find the real estate prices to be on the upper side. It’s impossible for common buyers to figure out reasonable price. And still every1 buying houses for 40L+ .. thnx to loans.

    I would really support tax benefits being withdrawn for house loans

  3. Hi,

    Situation in Borivali (W) is quite bad. I have just seen a mediocre 1BHK – unfurnished (20 years old) being rented at 12,500 p.m. Another flat in the same building is being sold at 54,00,000. Yield in this case is a measly 2.7%

    What would you advise about this market inefficiency?

  4. Subra,

    I am totally agree with you on this. The real estate prices itself are unregulated and every other person is witness to it.

  5. I came across a data (from a relatively old book) which says that in poorer Bangladesh 90% of the houses are owner occupied. In richer Switzerland, it is only 33%.

    I think if we are not obsessed about owning houses, some meaningful correction may be expected in real estate market.

  6. Hi Subra Sir,
    As much as the real estate industry is unregulated, there are a few people who are really making good money from it. They are builders, agents, & “investors” who invested into real estate at right time and right place.
    Agree, it is too much headache, huge risk involved, and huge amount of money involved. But the people who could navigate through the risks have really made it big.

  7. Weight is lost by being smart about one’s life. Eating less than what one consumes. Simple.

    Money is made by understanding that if you invest and get a return greater than the cost of funds, you will make money. Deepak Parekh, Uday Kotak, Vallabh Bhansali, etc. are people who have made a lot of money using their brains, their skills, leverage, etc.

    SO MONEY IS MADE USING BRAINS – not in real estate, equities, debt, gold or silver…THOSE ARE TOOLS…

  8. If the home loan companies are giving loan at 10% and you are getting a yield of 12% what is wrong in investing… does it not make sense. Guess housing loan for a salaried class is one of the best way to leverage….

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