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

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Archive for the ‘Real Estate’ Category

Delay your house

Posted by Muthu on May 10, 2015

As you would have noticed, I wrote lot of pieces last year. It has again come down to around two a month. The frequency depends on my ability to generate ideas. Whenever possible I’ll write more frequently. Otherwise, I’ll try to stick on to at least twice a month.

Today I’m sharing (with some modifications) a piece I wrote last year.

I happened to meet two friends from our industry recently.

The conversation went around the year 2002 when all asset classes were at multi year low, with all round pessimism and gloomy global scenario after 9/11 incident.

We people who prefer equity are a tiny minority in this country. We feel equity is not given the right place it deserves in investors’ portfolio despite it being better than real estate.

We reviewed some presentations which had data as to real estate prices in prime areas of Chennai around 2002.

I chose Adyar for this piece. It’s because Adyar is the place I live. Some time ago ‘Economic Times’ carried data as to how Adyar is the richest locality in Chennai. We purchased the flat we live during the above period (2002-03). We paid Rs.2300/- per square feet for the 1000 Sq.ft 2 BHK we live in.

After 12 years, a similar flat (a new 2 BHK) is quoting around Rs.15,000 per sq.ft. We paid Rs.23 lakhs in 2002, the value of which is Rs.1.5 crores now.

If I want to sell the flat, it would go for lesser than Rs.15000 per sq.ft as it is more than 10 years old. However for the purpose of this discussion and to the joy of real estate enthusiasts, let us assume we would be able to sell the old flat at the price of the new flat.

We took one fund in 2002. We choose Reliance Growth Fund since one of the friend was from there. The NAV of Reliance Growth Fund (RGF) as on 1’st January 2002 was Rs.19.75 It’s NAV as on May 8th 2015 was 778.55.

RGF was once an excellent performer and turned out to be an average fund during last couple of years.

If I had invested Rs.23 lakhs in RGF instead of Adyar flat, it’s value would now be Rs.9.06 crores or say Rs.9 crores.

Unlike house where I’ve to pay 20% capital gains tax and where I would be getting lesser value than market price, in RGF there is no tax on the gains made and I get 100% of NAV (after adjusting for STT).

Out of the Rs.9 crores proceeds:

I can now buy a 3BHK+ 1 Study (2200 sq.ft @ Rs.15000 per sq.ft) for Rs. 3.30 crores in Adyar itself.

I can also buy any high end luxury car for around Rs.40 lakhs.

The balance Rs.5.3 crores, by prudently investing in instruments like MIP, I can withdraw 9% per annum. This means I get Rs.47.70 lakhs per annum or a nice pension of around Rs.4 lakhs per month.

All we should have done is to invest in equity in early part of the career and bought the house in the later part.

I’m not against real estate. In my opinion, it has potential to generate few percentage points more than inflation in the long run. Also we all want to own the home we live in.

Since we tie up huge net worth including decades of future income also into the house, we never get opportunity to create big wealth which equity is capable of providing us.

We need to debate if it would be wiser to create wealth during the first 20 years of career through equity and then go for owning a house.

This is just a thought. The idea may have merits and demerits.

To me, merits appear significant.

Posted in Mutual Funds, Real Estate, Wealth | 28 Comments »

Some interesting real estate data

Posted by Muthu on April 20, 2015

Returns from real estate (residential)


                                                                                Real returns from real estate (city-wise residential)



(Source: http://www.wealthforumezine.net/AMCSpeakTATAMF100415.html#.VTRo-1KlTIX. Thanks to https://twitter.com/alphaideas )

Posted in Real Estate | 3 Comments »

36 years of performance: Sensex, Fixed Deposits, Gold and Silver

Posted by Muthu on April 1, 2015

April is the time for annual review. I would be sharing your portfolio summary along with my note. I aim to complete this task by end of this month. If any one of you does not receive the report from me by 30th of April, request you to inform me. I’ll take care to ensure that each one of you receive this.

Please note that for those of you who have become our clients after December 31’st 2014 would be receiving the report and review only in next April (2016). Three months or less is too short a period for review.

As always, other than the above, whenever you need a report or review during any time of the year, please feel free to get in touch with me.

For last 4 years, I’ve made it a practice to give performance comparison of various asset classes- Sensex (Equity), Fixed Deposit (Debt), Gold and Silver and the impact of inflation on them beginning from the financial year 1979-80. Why 1979-80? That is the year from which Sensex came into existence with base as 100.

Please find attached 3 files

a) 36 years return- FD & Sensex

b) 36 years return- Gold & Sensex

c) 36 years return- Silver & Sensex

1) Assume you’ve invested Rs.1 lakh each in FD, gold, silver and Sensex 36 years ago. As of 31’st March 2015 the value is as follows: FD- Rs.18.33 lakhs, Gold- Rs.33.54 lakhs, Silver- Rs.24.91 lakhs and Sensex- Rs.2.80 crores.

2) Unlike other assets mentioned above, Sensex has dividend yield in addition to capital growth. Assuming a dividend yield (duly reinvested) of 2% on an average, the Sensex return works out to Rs.5.13 crores.

3) To put it another way, during last 36 years:

Fixed Deposits has multiplied wealth by 18 times

Gold by 34 times

Silver by 25 times

Sensex by 280 times

4) In terms of percentage, the 36 years return (as given above) is as follows: FD-8.41%, Gold- 10.25%, Silver- 9.34% and Sensex- 16.93% (18.93% if dividend yield is as assumed above)

5) When we talk about returns, we’ve to talk about inflation too. The average annualized inflation for the above period is 7.73%.

6) If Rs.1 lakh has been kept under the mattress instead of being invested, it’s value has come down to mere Rs.5500 (i.e.) purchasing power of rupee reduced by whopping 94% over 36 year period.

7) What we should look for is real returns (i.e.) returns after inflation and taxes. Since tax differs from each asset class and income category, I’ve taken only inflation and excluded taxation. Inflation is common for all.

8) After adjusting for inflation, the asset classes have grown by following annualized rate in real terms: FD- 0.68%, Gold-2.52%, Silver-1.61% and Sensex- 9.2% ( 11.2% including dividend yield). These numbers matter a lot. This is what our wealth would have grown after adjusting for inflation. Since we know the tax details for each asset class and for our income, we can work out the return after taxes too. FD would automatically turn negative. Gold and Silver would have provided a negligible return. Only equity would have provided a real rate of return of above 9%.

9) Gold’s real rate of return of 2.52% is made possible due to rupee significantly depreciating between 1980s to early last decade. Otherwise we might have got even a negative return; as globally gold fell by around 70% during the above period. I’ll explain this by example. Assume the rupee dollar conversion rate is 1 USD = Rs.60. For illustration purposes, let us assume the price of 1 gram of gold is 1 USD. With the above conversion rate, the value of 1 gm of gold is Rs.60. Imagine a scenario when rupee depreciates by 100% (i.e.) 1 USD = Rs.120. The gold price remains the same at 1 USD. The value of our gold would increase by 100% to Rs.120 though the price has not changed in the international markets and we being the net importer of gold.

10) Please use FD for contingency or emergency funds. Let gold be part of social requirement and not exceed 5% to 10% of investment portfolio. Silver is again part of only social or cultural needs. Equity is for building wealth.

11) Real estate would normally give returns better than fixed deposits but lesser than equity. There is no reliable long term data available for real estate. From what I understand from reading, in the long run, real estate can be expected to give 2% to 3% more than inflation. If inflation is 6%, we may expect a long term price growth rate of around 9%. By providing 17% for nearly 4 decades, equity has scored well over real estate.

12) Please go through the workings and assumptions in the attached files. I’ve tried my best. It may not be perfect but would be a useful pointer. Request your opinion and feedback.

Posted in Basics, Gold, Muthu's Musings, Real Estate, Stock Market, Wealth | 5 Comments »

Some thoughts on real estate

Posted by Muthu on January 29, 2015

Every asset class goes through cycles. Ups and downs, bull and bear markets, boom and bursts, euphoria and despair are all very normal. No one and no asset class can escape this cycle. Likewise business and economy have their own cycles.

We Indians have been having for generations a peculiar belief that gold and real estate never fall in value. Last few years have been proving our people how wrong those beliefs are.

Gold price falling for last few years is nothing new.

Gold prices fell from $892 per ounce in 1980 to $272 in the year 2000. A fall of around 70% in value over 20 year period.

When gold has depreciated by 70%, the rupee has depreciated by 600% in the same period. One Dollar was worth Rs.8/- in 1981. Whereas the conversion rate was Rs.48/- in 2002.

So the gain we saw in the Indian market while prices fell globally was due to the depreciation in the value of rupee and strong appreciation in the value of dollar. It was not gold which gained but the dollar. This further strengthened our illusion that gold prices never fall.

Likewise people have forgotten the correction which happened in real estate prices between 1997 and 2003. Prices actually fell by around 30% even in places like Mumbai. Only from 2004 the mad appreciation of property prices started which again started slowing down from 2012. People are finding it difficult to sell properties for the last few years. Unsold inventories are piling up in all major cities. More than price correction, real estate goes through time correction. Let us assume a flat was bought in 2012 for Rs.1 crore. If it’s price remains stagnant for next 6 years and there are no buyers for the flat, people think that they have not made any loss. This is due to money illusion.

Money illusion is a separate topic I can write about. Let me explain the above. Rs.1 crore of 2018 is not same as Rs.1 crore in 2012. Inflation erodes the value of money. Assuming 8% inflation, if a buyer sells the flat for the same price after 6 years, he gets only around Rs.61 lakhs back in real term. There is a loss of 39% on the sale. Since most people buy on borrowing, if we take the interest paid, the loss would be more.

Government is taking steps to reduce black money. From recent news reports, it looks like having unaccounted money may even become a jailable offence. As India develop over years, we would become less corrupt and have less black money in circulation. The fall during the last few years would have been more severe but for the black money holding the prices.

People think that since our population is huge and as ‘God does not produce land any more’, real estate will go only in one direction, which is up. I’ve mentioned about this in May 2013 and I would mention it again.

Economist Ajay Shah says that if we place 1.2 billion people (population of India) in 4 person homes of 1000 square feet each and 2 workers of the above family in office or factory space of 400 square feet, it would occupy only 1% of land area of the country. Just 1% of land in India! FSI (Floor Space Index) assumed of the above calculation is just one. FSI is much higher in developed countries.

People lament that we are fast losing agricultural land near developing cities. What they do not know is that land under agriculture in India is higher than that of China. We are self sufficient in food, vegetables, minerals etc. India is one of the few places where one gets sunshine throughout the year. We are only 34% of the size of China but have more arable land then them. Vivek Kaul in one of his pieces has mentioned that at 157.35 million hectares, India holds the second largest agricultural land globally. Only, the United States has more agricultural land than India.

So just because more people want houses, housing prices are not going to hit the roof. The supply and supply capacity in India is much higher than what demand can be. Also as black money gets reduced and infrastructure improves, housing would become affordable for the masses.

Housing as an industry would develop a lot in the years to come. But for prices to pick up, it may take few more years. Real estate price growth in the long run would be 2% or 3% above inflation. If inflation is 6%, we may expect a long term price growth rate of around 9%.

These are some of the thoughts on real estate I want to share with you today.

Posted in Real Estate | Tagged: | 6 Comments »

Dalal Street or Samudra Mahal?

Posted by Muthu on January 26, 2015

Happy Republic Day.

Samudra Mahal in Mumbai is one of the most expensive properties in the country.

The Economic Times report that

“In one of the most expensive apartment transactions in India, Nandan Nilekani, Infosys co-founder, has paid about Rs.1.29 lakh per square feet, or Rs.22.5 crore, for a sea facing apartment in the marquee Samudra Mahal building at Worli in South Mumbai.

The deal for the 1,750 square feet three-bedroom property is the second most expensive transaction ever on a per-sq-ft basis for a residential apartment in the country. “

The cost of one square foot in Samudra Mahal was Rs.700 in 1970. At Rs.1,29,000 now, the value has multiplied by 184 times in 45 years. This works out to an annualised return of 12.29%.

In Dalal Street, Mumbai a sq.feet was Rs.100 in 1980. After 35 years, it sells at Rs.29,000 per sq.ft. Money multiplied by 290 times in 35 years. This works out to an annualized return of 17.58%.

Samudra Mahal can be bought and owned only by cream or elite of the society who are worth at least tens of crores, mostly hundreds of crores.

The property in Dalal street; your father could have bought with whatever money available at his disposal. You can buy it even now. Your son or daughter would be able to buy it even 20 years down the line.

The property in Dalal Street is a metaphor for Sensex. A sq.feet is one unit. If dividend yield is also included (assuming 2%+ CAGR), Sensex would have delivered around 20% annualized returns over last 35 years, significantly higher than the most expensive prime property in the country.

Good mutual funds and many stocks have delivered returns far superior to Sensex itself.

Power of equity is least understood in this country.

If you can withstand notional loss (if you don’t book) in portfolio during bear markets, not worry about daily price movements, it is possible to make much better money than what can be made out of best of the real estate.

Give at least the same importance to equity as you give to real estate.

You don’t mind holding real estate for 20 or 30 years. Please do the same for equity ignoring bull and bear markets, notional profits and losses.

Many of you have been investing for last couple of years. Stay the course for at least another 15 to 20 years completely ignoring market fluctuations. You would be amazed at the fortune created for your retirement or to pass on to your children.

All the best.

Posted in Real Estate, Stock Market, Wealth | Tagged: , | 8 Comments »