Where to Invest – In Real Estate or Stock Market

Due to huge demands, real estate prices in India in both residential as well as commercial have shown an upward movement in last few years. This sector has seen a very strong growth and appreciation in prices as well increased ROI (Return on Investment). Since last few years Indian Real Estate Market has been the attraction point of so many domestic as well as international investors. In India, real estate market capitalization is 4.2%, whereas global norm is 15%. So we can anticipate more growth in this sector. Since last few years, several real estate companies have come up with IPOs. On July 9, 2007 BSE had introduced yet another index – The BSE Realty Index comprising of real estate stocks.

It has always been a question that if one should invest in Real Estate or should move ahead with Stock market. If I talk about my experience about investment decisions in both real estate as well as stock market, I will prefer real estate. It’s not because I am in this sector. It’s because of the rate of returns. Rate of returns has always been high in real estate. There are fewer chances for less appreciation in real estate as compared to stock market. Also, it is more certain than stock market. Both the real estate and the stock market reflect the economy of a country and offer good investment opportunities. However, the risks must be understood along with the opportunities.

How many of us have ever thought that, owning an apartment or house is not a matter of owning a financial asset but of settling down and homemaking. Nevertheless, home ownership is also the most primary form of real estate investment. Moreover, unlike stocks, real estate is a tangible asset that provides for greater psychological comfort, security and satisfaction. Also , the ROI for real estate is reasonably consistent because of the phenomenon of property appreciation.

Real estate investment also offers benefits such as tax deductions on home loan interest, continuous capital appreciation and greater stability. Property historically appreciates in value without many violent downswings. It can be purchased on a down payment of 1/5th of its total value, and the remainder can be financed by a bank. Financial institutions will lend money to a real estate buyer more easily than to stock market investors.

If we talk only about Stock market, the profit margin in stock investments has been noticed higher as per compared to other asset classes. Stock market investments offer advantages such as liquidity and flexibility, which real estate does not. Stock prices also offer growth rates that the real estate market can rarely match. Stocks are also relatively easier to acquire and require lower investment to buy, sell and hold as compared to real estate, which has high transaction and other related costs such as broker commissions, legal fees, property taxes, insurance and maintenance costs.

The major issue is that, Stock markets are far less predictable, as evidenced by various ‘Black Mondays’ or ‘Black Fridays’ on which the Sensex tanked by between 8-12% of its value in a single day. Though real estate values have certainly slumped in some cities in the last few decades, no real estate market ever dropped by 10% in one day, week or even month like stock market.erm (7-10 years) one isn’t likely to lose. Real estate values generally go up in the long run, with few exceptions. Fundamentally, the real estate market is a lot less volatile than the stock market.

Real estate prices tend to sink far slower than they rise, since property owners are more hesitant to sell in a downturn. Property investment also helps in diversification, hedging inflation and yield enrichment.

Realty Stocks

Realty stocks allow investors to participate in large-scale real estate projects without having to inject massive amounts into non-liquid investments. They also circumvent the inherent complexities of real estate development in the country and give average investors access to a large array of office, retail and hospitality real estate projects which would otherwise be out of their reach.

Moreover, the investor does not have to actively manage any properties. For someone looking for a passive real estate investment with the added benefits of portfolio diversification and liquidity, an investment into a realty stock is certainly a good option. Real estate development companies with realistic projections and predictable incomes are far less volatile than most stocks. However, investors need ensure that the company is professionally managed and that investment decisions taken with circumspection.

Obviously, there is a direct link between the stock and real estate markets. In an escalating stock market, the profits find real estate the best place for reinvesting funds, leading to escalation in property prices. By the same coin, the gradual collapse of stock markets reflect visibly on real estate markets. Both markets represent the two major asset classes for growth investing. Both allow investors to participate in long-term appreciation of values. Both asset classes should be included in a balanced investment portfolio depending on the risk-return profile and in-depth understanding of the particular asset class.