Real estate losing sheen to mutual funds

Thinking about buying a house? After all, property is a safe investment - so everyone has told you. Well, there may be more to it than meets the eye.

Historically, Indians have preferred investing in property for the long term as this asset is perceived as a 'safe' investment. This preference was accentuated after the 2008 financial crisis when investors shifted from financial assets (securities, stocks, etc.) to physical assets (like gold, property, etc.). Yet, that trend may not be true for the future; here is why:

Property is losing its sheen: Currently, there is a situation of over-supply with more property available than the demand for this asset. This supply glut along with the project pipeline already under construction could take over 10 years to dispose off.

Genuine demand for real estate seems low? Census data from 2011 indicates that India has more houses than households. This is a clear indicator that some people actually own more homes than they need and they purchased these as investments. This indicates a high possibility of real estate being used to stash away black money.

So what lies ahead? There is already a realisation in the real estate industry that things are changing. There is a huge backlog in the inventory of real estate across India. To increase sales and clear this backlog, many discounts and offers are available for new buyers of property. According to data made available by Liases Foras, a Mumbai based real estate rating and research firm, residential inventory in Delhi, Mumbai and Bangalore has now reached its highest levels in the last five years. Declining sales and rising inventories are beginning to affect developers adversely.

Changing perception towards real estate: While in the past, people would simply put their ill-gotten wealth into property thinking of it as a safe haven, things are now changing. Many people are now more aware of the low returns real estate investments have offered in the recent past. Today, many investors would be wary of an overexposure to real estate because:

They seek positive investment returns which mean returns that are positive after adjusting for inflation.

They are aware of the new government's determination to root out black money. The government wants to enact the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill which would make tax evasion by owning unofficial foreign assets a criminal offence.

They own sufficient amounts of property and may be already overexposed to the asset class.

Conclusion: It is no secret that the Indian property market attracts a lot of cash money and with the government's new anti-black money initiatives in place, the property market is going to be further impacted. This makes investing in financial assets such as mutual funds increasingly attractive; not only can you invest with maximum convenience (sitting at your computer and hitting a few keys to initiate the investment), mutual funds have the potential to offer attractive investment returns thereby helping you build your wealth.

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.

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