Invest for tomorrow – an analysis of investing in equities and real estate in india.


Published on

Published in: Economy & Finance, Business
  • Be the first to comment

  • Be the first to like this

Invest for tomorrow – an analysis of investing in equities and real estate in india.

  1. 1. Invest for tomorrow – An analysis of investing in equities and real estate in India. Background(Shining India):- India has been looked up as an attractive investment destination since early 2000’s and India has been expected to be amongst top 3 economies in the world by year 2025-30 periods.But since then much has changed in India as well as across the world, including a global meltdown in 2007-08 period and even India has had its ups and downs to register its lowest quarterly growth sub 5% in 2012-13 last quarter.Still India is the ninth-largest in the world by nominal GDP and the third-largest by purchasing power parity (PPP) and it is one of the G-20 major economies and a member of BRICS. On a per-capita-income basis, India is ranked 141st by nominal GDP and 130th by GDP (PPP) in 2012, according to the IMF. India is the 19th-largest exporter and the 10th-largest importer in the world now. As discussed earlier, economic growth rate of India slowed to around 5.0% for the 2012–13 fiscal year compared with 6.2% in the previous fiscal. It is to be noted that India's GDP grew by an astounding 9.3% in 2010–11. Thus, the growth rate has nearly halved in just three years. GDP growth went up marginally to 4.8% during the quarter through March 2013, from about 4.7% in the previous quarter. The government has forecasted a growth of 6.1%-6.7% for the year 2013-14, whilst the RBI expects the same to be at 5.7%. These low rates are partially attributed to global meltdown/recession and partially to the so called policy paralysis, corruption and series of populist programs all leading to widening fiscal deficit, current account deficit, and higher inflation, weakening rupee and ultimately growth. But these low growth rates are now considered to be the bottomed out figures for Indian economy according to various reports from World Bank /IMF / Global rating agencies and there has been genuine efforts from Indian government to fix most of the economic problems by pursuing reformist measures like diesel price de regulation, opening up of FDI cap in various sectors like retail /telecom etc. And today there is a common demand in India for good governance and growth which is going to go a long way in shaping up India’s economic status by 2025. Let’s analyse two articles / report appeared in 2005 and 2012-December, discussing India’s future growth prospects and India’s expected economic status by year 2025-30 period to understand the global view of India pre global meltdown and post global meltdown as well as post the mediocre growth witnessed in the last few years. Year- 2005/ Business Standard (India a giant economy? Yes, by 2035!) According to the article share of the US in world GDP is expected to fall from 21 per cent to 18 per cent by 2005 and that of India rise from 6 per cent to 11 per cent in 2025 and by 2025 the Indian economy is projected to be about 60 per cent the size of the US economy. By 2035, India is likely to be a larger growth driver than the six largest countries in the EU, though its impact will be a little over half that of
  2. 2. the US. Year- 2012 (December) / PTI (US intelligence sees India as rising economic powerhouse in 2030) According to the article US intelligence (National Intelligence Council (NIC)) has predicted that by 2030, India could be the rising economic powerhouse of the world as China is seen today and that it will continue to consolidate its power advantage over Pakistan. Report says, by 2030 India could be the rising economic powerhouse that China is seen to be today. India's rate of economic growth is likely to rise while China's slows and the total size of the Chinese working-age population will peak in 2016 and decline from 994 million to about 961 million in 2030 but in contrast, India's working-age population is unlikely to peak until about 2050. According to the NIC report, the World Bank assesses that India will join China as an "emerging economy growth pole" by 2025, which could help to strengthen the global economy. India's expected robust growth in the next 15-20 years means that its contribution to global growth will surpass that of any individual advanced economy except the United States. World Bank modeling suggests that together China and India will serve as nearly twice the engine for growth as of the United States and the euro zone combined by 2025. NIC report said long-term forecasts show Indian economic power growing steadily throughout the 21st century and overtaking China at the end of the century because of China's maturing age structure and to maximize its advantage from the greater proportion of youths, however, India will need to boost its educational system, both attainment and quality at lower levels; make substantial governance improvements, particularly in countering corruption; and undertake large-scale infrastructure program to keep pace with rapid urbanization and the needs of a more advanced economy. Conclusion:- Both the reports highlight the potential of India as well as the world view of India’s growth potential way back in 2005 (Pre global meltdown) as well as post it. Hence we may conclude that World is going to bet on India’s growth story high and big in the coming days to months to years and will continue to treat India as the most attractive investment destination in the emerging world and as it happened across the world, economic growth of any economy is reflected through the real estate market and equity market , as both these avenues capture the economic growth in real terms and reflect moods most accurately, thus qualifying to become the most commonly accessed avenues of investments for investors looking for capital appreciation/building across the world. In this article I will discuss few basic but effective tools to invest in these avenues to make most of it in the coming 10-15 years ahead. Real estate investment:- The real estate sector in India has come a long way by becoming one of the fastest growing markets in the world. It is not only successfully attracting domestic real estate developers, but foreign investors as well. The growth of the industry is attributed mainly to a large population base, rising income level, and rapid urbanization. The sector comprises of four sub-sectors- housing, retail, hospitality, and commercial. While housing contributes to five-six percent of the country’s gross domestic product (GDP), the remaining three sub-sectors are also growing at a rapid pace, meeting the increasing infrastructural needs. The real estate sector has transformed from being an unorganized to a dynamic and organized sector over the past decade. Government policies have been instrumental in providing support after recognizing the need for infrastructure development in order to ensure better standard of living for its citizens. In addition to this, adequate infrastructure forms a prerequisite for sustaining the long-term growth momentum of the economy.
  3. 3. Market Size/ Growth Prospects The total revenue of the real estate sector was US$ 66.8 billion during 2010-11. By 2020, the sector is expected to earn revenue of US$ 180 billion. In fact, the demand is expected to grow at a compound annual growth rate (CAGR) of 19 per cent between 2010 and 2014, with tier I, metropolitan cities projected to account for about 40 per cent of this. Growing infrastructure requirements from sectors such as education, healthcare and tourism are providing numerous opportunities in the sector. Further, India is going to produce an estimated two million new graduates from various Indian universities during this year, creating demand for 100 million square feet of office and industrial space. In addition, presence of a large number of Fortune 500 and other reputed companies will attract more companies to initiate their operational bases in India thus, creating more demand for corporate space. Investments India is ranked 20th in the list of world’s top real estate investment markets with investment volume of US$ 3.4 billion in 2012, according to the latest report titled 'International Investment Atlas' by Cushman & Wakefield. The sector is set for robust inflows of US$ 4-5 billion from overseas investors in the next couple of years, with Bangalore, Delhi and Mumbai emerging as the favorites, according to Jones Lang LaSalle, a global real estate consultancy giant. Construction development sector (including townships, housing, built-up infrastructure & construction-development projects) has attracted a cumulative foreign direct investment (FDI) worth US$ 22,007.67 million from April 2000 to February 2013. FDI flows into the construction sector for the period April-February 2012-13 stood at US$ 1,260 million, according to the department of industrial policy and promotion (DIPP). Bengaluru witnessed the highest number and value of private equity investments at Rs 32.5 billion (US$ 585.57 million) in 2012, recording more than double of investment over last year, followed by Mumbai with Rs 13 billion (US$ 234.17 million) and National Capital Region (NCR) with Rs 7 billion (US$ 126.09 million) of investments. India needs to invest US$ 1.2 trillion over the next 20 years to modernize urban infrastructure and keep pace with the growing urbanization, as per a report released by McKinsey Global Institute (MGI)-India's urban awakening. Road Ahead The real estate industry in India is yet in a promising stage. The sector happens to be the second largest employer after agriculture and is expected to grow at the rate of 30 per cent over the next decade. A growing migrant population due to increasing job opportunities, together with healthy infrastructure development, is underpinning demand in the region’s residential real estate market Source: NHB - Reisdex In order to guide and oversee the construction of NHB RESIDEX and extension of its coverage, to include all the 63 cities under Jawaharlal Nehru National Urban Renewal Mission (JNNURM); a Standing Committee of technical experts has been constituted under the Chairmanship of CMD, NHB with representations from the Government of India, (Ministry of Finance, NSSO, CSO, Labour Bureau), RBI, and other prominent market players. At present, index is being developed only for residential housing sector. However, at a later stage, based on experience of constructing this index for a wider geographical spread, the scope of the index could be expanded to develop separate indices for commercial property and land, which could be combined to arrive at the real estate price index. NHB-RESIDEX INDEX AS ON MARCH 2013 Base Year: 2007, Base Value: 100
  4. 4. CITIES 2007 Index Jan- Mar 2013 Index CAGR (6 years) Hyderabad 100 88 -2.11 Faridabad 100 207 12.89 Patna 100 152 7.23 Ahmedabad 100 192 11.49 Chennai 100 310 20.75 Jaipur 100 112 1.91 Lucknow 100 183 10.6 Pune 100 221 14.13 Surat 100 140 5.77 Kochi 100 89 -1.92 Bhopal 100 230 14.89 Kolkata 100 197 11.96 Mumbai 100 222 14.22 Bengaluru 100 109 1.45 Delhi 100 202 12.43 Bhubneshwar 100 197 11.96 Guwahati 100 153 7.35 Ludhiana 100 167 8.92 Vijayawada 100 184 10.7 Indore 100 195 11.77 Chandigarh 100 194 11.68 Coimbatore 100 184 10.7 Dehradun 100 183 10.6 Meerut 100 191 11.39 Nagpur 100 163 8.48 Raipur 100 156 7.69 Source: Explanation:- Above Residex Index shows the growth of real estate sector from 2007 to 2013 and except Kochi and Hyderabad; rest all cities/towns tracked has given positive returns, with Chennai investments fetching almost three times the investment in 6 years at time when Indian GDP growth has been shrinking in line with global trend. Investments methods in real estate:-
  5. 5. Real estate investments needs to be done post analyzing few informations i.e. the growth drivers for next 5-10 years in the location , number of infrastructure projects , offices , other institutions expected to come up the nearby location , political stability etc. These informations are important to understand whether there will be a higher demand in the future or whether there is going to be an excessive supply of properties in case of investments in apartments, official complex etc against expected business. If you look at the prices in Hyderabad, the fall can be attributed to political unrest there due to Telagana issue, protests etc and in Kochi it is the case of excessive supply which has resulted erosion of values as the expected major development projects like Smart city, Metro rail etc may take few more years to be operational resulting in a miss match between demand and supply. Now these informations can be obtained from the organized real estate agents spread across the cities and towns for a fee, hence buyer need not necessarily be updated on these aspects before buying/selling decisions but can take the guidance from real estate agents for a fee. Investment options in real estate:- Now while investing in real estate one can go in for either full cash basis or 20:80 basis, where 20% of own funds and 80% of bank funds raised based on financial strength of the buyer. Later is called leveraging. Now let’s compare both the investment options, under the same period of investments i.e. 6 years between 2007 -12 and let’s take the best location i.e. Chennai. (Please note these calculations are mere indicators) Option 1:- Assumption: - Full cash basis / per square feet price is 100 in 2007, inclusive of taxes & duties Option 2:- Assumption:- Leveraging model ( 20:80) / Per square feet price is 100 in 2007 , inclusive of taxes & duties / Home loan tenure is 72 months / Home loan interest rate is fixed 10% / Amount equivalent to bank loan is invested by the buyer in HDFC MF (G) fund for the same period. Example:- Location Square feet Price in 2007 Price in 2012 Investment amount Present Value Chennai 1000 100 310 100000 310000 Comparison Own funds 20000 100000 Bank-Loan 80000 0 Loan Interest and principal paid for 6 years 106704 0
  6. 6. Net earnings if sold today 183296 210000 Investment Amount-07 Fund name CAGR for 6 years Maturity Value-12 80000 HDFC MF (G) 12% 160976 Explanation:- From the above example, we can see that with an investment of Rs.20,000/- initially, the buyer could make an earning of Rs.183296/- due to leveraging mechanism against a return of Rs.210000/- on an initial outlay of Rs.100000/-. Now assume if the buyer had invested the Rs.80, 000/- in a mutual fund plan of HDFC Equity (G) in the same period, he would have earned Rs.80975 @ 12% CAGR taking total earning to Rs. 264271/- against the Rs.2, 10,000/- return earned while doing investment full cash basis. Add to this , RBI has directed banks in India to not charge prepayment penalty with respect to certain home loan products and this further incentivises buyer to use leverage program and pre close the loan and reduce the outflow, whenever the real estate prices goes up and meet buyers selling targets. Hence ideal way of investment in real estate should be through leveraging option, so that there is a diversification of investments as well as leveraging of one’s financial credentials. Capital Market or Equity investment avenue:- Let’s understand the significance of equity market investment from the below produced report from PricewaterhouseCoopers. 2011- Dec/ India to be among most favourable listing destinations by 2025 (PWC-Report) The future of equity capital markets is shifting towards the East and in 15 years time, India is likely to be among the most favourable listing destinations for foreign companies, says the report. Report which covered 400 senior managers at companies from across the globe, finds developing Asia as the most popular region for future listings. Nearly 80 per cent of respondents covered by the study believe China will be the home of most new issuers and will also be the domicile to raise the largest pool of equity capital by 2025, while India comes second in terms of issuers (voted for by 59 per cent of respondents) and third in terms of capital (39 per cent). Meanwhile, in terms of electronic-order-book value, the National Stock Exchange of India is now the fourth-largest exchange by number of trades in equity shares globally and India's primary markets are growing rapidly; in 2010 a total of 63 IPOs raised USD 8.3 billion for domestic companies, up from USD 4.5 billion raised by 36 IPOs in 2008. However, amid global economic turmoil, domestic firms raised only USD 1.14 billion through 34 IPOs in 2011calendar year, according to the data by global consultancy firm Ernst and Young.
  7. 7. And these reports are testified by the performance of NSE Nifty Index performance between 2007-20012, when world had gone through a rough patch. Stock Exchange 2007 2012 CAGR CNX Nifty 3966 5905 6.86 Report shows CAGR of 6.86 % from Indian equity markets at a time world over equity markets went haywire and turned bearish. Similar to real estate investments, equity investments too need detailed understanding on various aspects of economy and like real estate agents, for equities there are well regulated corporate providing free advice and free investment options (No entry load) in capital markets by way of mutual funds. Let’s discuss few investment options in equities through mutual fund route:- SIP (Systematic Investment Plans & Lump sum plans) A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help investors save regularly. It is just like a recurring deposit with the post office or bank where you put in a small amount every month, except the amount is invested in a mutual fund. The minimum amount to be invested can be as small as 100 (100 Indian Rupees) and the frequency of investment is usually monthly or quarterly. A SIP allows investment in the stock market without trying to second-guess its movements. It is also known as dollar cost averaging. A SIP means the person commits to investing a fixed amount every month. Let's say it is 1,000. When the Market price of shares fall, the investor benefits by purchasing more units; and is protected by purchasing less when the price rises. Thus the average cost of units is always closer to the lower end. NAV: Net Asset Value, or the price of one unit of a fund. Can be computed as follows: NAV = [market value of all the investments in the fund + current assets + deposits - liabilities] divided by the number of units outstanding. Examples of SIP returns for the period between 2007 – 2012 (6 years). Fund Name Amount Interval Period (Yrs) CAGR % Total amount Invested (Rs) Investment value as on 1/7/13 (Rs) Net- Earning (Rs) AUM(Crores) HDFC Equity (G) 10000 Monthly 6 13.15 720000 1062162 342162 101393 Reliance Vision Fund (G) 10000 Monthly 6 6.7 720000 877865 157865 94580 HDFC Balanced Fund (G) 10000 Monthly 6 14.59 720000 1108066 388066 101393 ICICI Prudential 10000 Monthly 6 11.41 720000 1009167 289167 87835
  8. 8. Balanced Fund (G) Lump sum or Bulk investments:- Unlike SIPs, lump sum investment is one time investments and not a monthly or any other interval affair. Let’s see examples of lump sum mutual fund investments for the same period between 2007-2012. MF – Bulk investment returns Fund Name Period (Yrs) NAV-07 NAV-12 CAGR HDFC Equity (G) 6 147.28 293.42 12.17 Reliance Vision Fund (G) 6 184.85 269.66 6.5 HDFC Balanced Fund (G) 6 32.22 63.91 12.09 ICICI Prudential Balanced Fund (G) 6 35.09 55.71 8.01 Explanation:- From the above return chart it is quite clear that SIP route is the best investment option to en cash the equity market potential. On one side SIP route enables lower investment outlays against lump sum investments and return wise SIP scores better over longer period of time. Equity Vs Real estate:- If we compare equities and real estate investments, equities scores over real estate in terms of availability of quality advising, Low cost (No entry load and No exit load if redeemed after 1 year as well as no long term capital gain tax) compared to real estate investments, SIP route enables low capital for investing in equity market (As low as Rs.100/-), which is not possible in case of real estate, Liquidity of equity market / Mutual funds is another major advantage over real estate. But real estate return potential can be much higher than equity market returns if economy starts doing well over a period of time, we may see a price doubling in a year’s time, which does not happens with equities except of some rare phenomena and real estate has supplemetary income avenues like rent and can be used as a collateral for further leveraging. But ultimately both real estate and equities capture the growth potential of an economy, even at times where economy may seem to be struggling and both these avenues reflect economic growth better than any other investment instruments. And probably it is time for all us to plan our finances in such a way that we invest maximum in equities and real estate for the next 10-15 years and reap maximum wealth accumulation in future. Conclusion:- Both equity and real estate gives maximum returns consistently over longer period of time and it is better to diversify ones risk by investing in both the asset class than putting all money in a particular asset.
  9. 9. When it comes to equities, SIP route is the most rewarding and performing and when it comes to real estate, leveraging finances by going 20:80 (20% own funds and 80% borrowed) is preferred. Finally both the discussed asset class captures economic boom early and reflects it most accurately with growth and enable investors to reap benefits of economic boom better than any other asset class. Hence every existing / potential investor should visit a near bank branch and check his /her loan eligibility for mortgages / home loans and check various SIP schemes of leading mutual funds and plan out their investment strategy for next 10-15 years to be truly part of India story when it gets its peak in 2025-30 period and thus truly invest for tomorrow.