Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Is equity superior to real estate?

Posted by Muthu on December 9, 2012

One of the fund which has been in existence for last 17 years has multiplied the investor wealth by 50 times in the above period (i.e.) Rs.1 lakh invested in the fund 17 years ago is now worth Rs.50 lakh.

Why I’m saying this? 

Equity is least understood and less owned in our country. Typically across the world equity has out performed real estate by significant margin over long time. With my limited knowledge of Indian real estate, I can still stick my neck out and say equity has done better than real estate even in India.

We sold a property in Chromepet 10 years ago and bought one at Adyar in the same period. Roughly values of both the properties have grown by 6 to 7 times. A 6 times growth in 10 years means an annualized return of 19.62%. Good isn’t it? Yes. But what goes unobserved is that many good funds have given return in the range of 25% to 30% after expenses in the same period. A 30% return means wealth has multiplied by 14 times during last 10 years. So a good fund would have done much better than a property in prime location in Adyar.

Immediately a question may come. Say what about OMR? Some one bought a piece of property for Rs.3 lakhs and it’s value is now Rs.1.5 crore; 50 times multiplication of money in 10 years. 

When we compare two asset classes, we need to compare the average and NOT a specific property.

To illustrate better, if a particular piece of property has grown by 50 times then we’ve to see if any companies (individual stock) have grown that way.

 Let me give 2 examples from the Business World issue dated 14th November 2011.

A company called Era Engineering has multiplied the investor wealth by 219 times during the previous 10 year period. So 3 lakh invested in Era Engineering instead of say a property in Thoraipakkam at OMR, would have made it Rs.6.57 crore.

People in Chennai know about a company called Shriram Transport Finance. The same Rs.3 lakhs invested in this company during the above period would have become R.2.64 crore; 88 times return.

As per Outlook Business issue date 8th December 2012; In 1963, Godrej paid Rs.1 lakh to buy his first house, a 2916 sq.feet apartment at Usha Kiran, Carmicheal road, in tony South Mumbai; early last year he sold it for Rs.25 crore. “ On the face of it, it looks like a stupendous gain but the fact is, the appreciation is just around 20% CAGR” he points out. “ Now after we demerged Godrej Consumer from Godrej Industries in 2001, in just 11 years, the CAGR in the share prices of Godrej Consumer and Godrej industries has been upwards of 40% to 50%”.

Two years ago, a 3600 sq. feet apartment in Samudra Mahal, Worli was sold for Rs.33 crore. This works out to roughly Rs.1 lakh per square foot, costliest residential real estate deal recorded in India. It was purchased for Rs.25 lakhs in 1972. If you calculate annualized return for this expensive deal, it works out to 13.71%. Sensex has given a much superior return in last 3 decades.

If some one can give me an example of how a property multiplied to unimaginable higher levels, I would be happy to hear the same. Let me reproduce a part of my earlier post where how unimaginable higher level even a stock can achieve:

Some who read the last article could not believe Rs.10,000 invested in Wipro in 1980 becoming Rs.465 crores now.

You should not simply multiply 1980 price and today’s price for one share. Unlike real estate, a financial asset like shares keeps multiplying both in numbers and in value.

Real estate only multiplies in value.

Here is the break up details.

Suppose you invested in Wipro Rs.10,000- 100 shares each @ Rs.100 in 1980

1981 – 1:1 Bonus =200 shares

1985 – 1:1 Bonus =400 shares

1986 stock split to  Rs.10 face value =4000 shares

1987- 1 :1 Bonus =8000 shares

1989-  1:1 Bonus =16000 shares

1992 – 1:1 Bonus =32000 shares

1995 – 1:1 Bonus =64000 shares

1997 – 2:1 Bonus =1,92,000 shares

1999 stock split to Rs. 2 face value =9,60,000 shares

2004 – 2:1 Bonus =28,80,000 shares

2005- 1:1 Bonus =57,60,000 shares

2010 – 3:2 Bonus =96,00,000 shares

Value of one Wipro share on last Friday is Rs.477.

So your investment is worth around Rs.458 crores today. The difference of Rs.7 crores in value from my previous article is due to severe fall in the markets for the last few days.

Please note that the above data do not capture the dividend income earned during the last 30 years at all. For example in last year the dividend declared was Rs.6 per share. So you would have earned  Rs.5.76 crores last year alone as dividend income.  Not bad for a Rupees ten thousand investment!”

The idea of writing the piece is not to negate real estate. I’ve nothing per se against real estate; though the market conditions, price levels and opaqueness in Indian real estate make me extremely uncomfortable.

Like wise I’ve written a lot about gold earlier and I don’t want to repeat the same. Roughly gold has returned around 8 times in last 10 years. As we’ve seen above, good funds have even returned 10 to 14 times in the same period. You all know that I don’t value gold much as an investment and has given the rational for the same, many a times in the past.

Investing in equity helps the economy and more than that help us too. We don’t understand equity as much as we think we understand the other asset classes.

Earlier this year, in this article, I’ve compared the last 3 decades returns of FD, gold, silver and Sensex. The result is there to see.

The returns in the examples given above is purely to highlight the point of this piece. I don’t recommend any of those companies to you for investment. Like wise, the past returns mentioned for funds may or may not be repeated in the future. Kindly do not forget to read the disclaimer. I do not recommend any direct stock picking for our clients and believe the best way for them to participate in equity market is through SIP in a good portfolio of funds.

7 Responses to “Is equity superior to real estate?”

  1. Milind said

    Thank you very much sir .I am keeping my hope in SIP investment diligently ,after doing Asset allocation ,Proper Term Insurance and Medical Insurance.Every Sunday there is a reminder for Additional Investment in Prudance which is executed diligently.Hope it will help me to create Rainbow after many years.Wiproes example is certainly GREAT ! Thank u sir

  2. senthil said

    Fantastic article, with some real numbers to support the “fact” that equity has outperformed real estate, even in the booming decade of the oughts, when house prices went up by a factor of 5 or more.

    I have beaten it into my brain the following numbers:

    8:9:30
    9:8:27
    10:7:24
    12:6:20
    15:5:17
    19:4:13
    26:3:10
    42:2:6.5

    The first column being the CAGR and the second and third rates being the number of years (approximately) for your money to double and become tenfold. The doubling and ten-fold numbers are psychologically critical ratios since these are the numbers that people like to bandy about when they talk about their asset appreciation.

    The average equity performance over the last thirty years or so (~15%+) would have appreciated your money hundred fold. The better performing mutual funds over the last 20 years or so (HDFC top 200 comes to mind), have had CAGR of ~ 20% or more, which would have, on average doubled your money in 4 years and ten-folded in 12 years or so. Mind boggling! “Average” real estate has come nowhere close to this performance.

  3. excellent article as usual

  4. Raman said

    Real estate has given great returns in past five years in Chennai but it does not indicate the same story will go on forever..

  5. Govindarajan said

    The important point is hit rate in equity is very less. What if some one has chosen stock like Ceat or Century Textiles and held on to it till they realize that it is not worth to hold further. Opporunity will be lost in such cases though we would have spent considerable period of their investment horizon. Hit rate in Realestate is more thats why people prefer RE. In your analysis on Equity mutual funds returns it is unfair on your part to compare real estate price appreciation with a diversified mutual fund Growth option (where dividends are re-invested). We need to see price appreciation with compounded re-investment of rental income also. Also diversified equity fund is a combination of several stocks from different sector and growth phases. So we need to compare a realestate index (if one is available?) having constituents from all areas of Chennai. Am I correct? Anyway equity or RE it is the selection at right price and holding on to them for long will result in capital appreciation (while re-investing dividends/rental)

  6. Buying real estate without loan is not possible, Selling & Holding real estate is one more headache,If you have already having own house, I think we should prefer equity, There is no official real estate index like sensex, The real estate market works on emotions and greed of the people

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