“Buying where prices haven’t already appreciated (in tiers 2 & 3, outskirts of a metro) can mean good ROI (return on investment). But this is like buying a smallcap stock, hoping it becomes largecap; only a few do. It is a high-risk strategy and hence capital allocation should be lower,” Kamath said.
In a Twitter thread, he argued that for the property yield to be greater than inflation, the price has to go up by at least 10% per year to beat inflation or double every 7 years. “For the price of the property to double every 7 years, the rents also have to go up as much. Not happening in most places in India. For eg, if a flat costing Rs 1 cr can be rented at Rs 20k/month. For the price to go to Rs 2 cr, ideally rent has to go to Rs 40k/month as well.”
The Bengaluru-based billionaire said just like stocks, real estate prices can also go up without good fundamentals. “Usually when that happens, stocks, real estate, crypto, etc., prices don’t stay up there for too long. For real estate, rental yields are probably the best measure of fundamentals,” he argued, adding that real estate is illiquid, just like private market valuations.
“Real price vs last transacted price that sellers claim could be way off. The other risk is since the price is fixed & paid upfront, you can’t take advantage of price fluctuations through a SIP as in stocks or MF.”
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The stock broker said at today’s prices, real estate is unlikely to beat inflation and interest costs in the long run. “A house will provide financial & emotional security, but financial returns as an investment won’t be enough to cover for retirement as in the past,” Kamath said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)