Real Estate Investment vs. Share Market in 2021-22. Which is a safer option?

March 06, 2021
Real Estate Investment vs. Share Market in 2021-22. Which is a safer option?

The real estate market is one of the frontrunners of the economy of India. In addition to agriculture, it is also the country's primary job-creating industry and contributes 7% of its GDP. It has also been estimated that, if the announced policy measures are adequately enforced, the sector will donate 13% to the economy by 2025. This indicates that the industry still offers a plethora of investment opportunities. (Source- CNBCTV18.com)

However, the real estate market has gone through a range of ups and downs in recent years. As soon as the industry started to conquer the initial shock caused by systemic changes such as GST and RERA, the Covid-19 pandemic reached our shores. The nationwide lockdowns have led to fragmented supply chains and have caused issues with overseas procurement. The industry was also troubled with liquidity challenges and labour shortages.

Yet as we now have the vaccine, things are starting to look up positively. Investors are planning & plotting if it is a smart investment to invest in real estate in 2021.

Let us run through quickly the crucial factors which will help understand the current markets & how investing in real estate is a safer option:

Changed customer behaviour post Covid-
The pandemic has triggered a sudden shift in consumer behaviour and people's views of the real estate industry have shifted. Buyers investing in residential properties today want larger configurations with improved protection controls, emphasizing sanitation and captive facilities. With WFH being a standard, we might also see a growth in demand for residential properties with dedicated office spaces.
If we include commercial real estate properties, satellite offices outside the central business areas will receive further interest.

The Road of Recovery-
The Prime Minister's call for self-reliance in the Atmanirbhar Bharat campaign was a positive sign for the real estate industry. The growth in foreign direct investment (FDI) is also a measure of fast recovery.
At the time, the devastation created by the pandemic may appear incomprehensible, but we do not forget that any catastrophe seems tiny in hindsight. The Covid-19 is just a blip on the global screen, and the Indian commercial real estate market continues to draw buyers who have their sights set on the long-term range. With the 2021-22 budgets have shown significant situation with regards to the affordable housing segment, the government will develop several flexibilities that will further fuel demand and attract even more exposure to investors. (Source- CNBCTV18.com)

As we advance into 2021, we can expect to see a consistent investment flow as easy liquidity by global central banks keeps a tight leash on interest rates and real estate investments promise high yields.

According to Savills India's report, private equity investment in the Indian realty sector may recover tremendously. It may bring an influx of $6 billion in 2021, registering a 30% Y-O-Y growth.

As the government undertakes economic recovery and development measures, metropolitan areas' real estate prices will stabilize. They may register an upwards in certain areas as the demand in those areas improves.

Increase in safe harbor limit w.r.t. sale of residential units-
To incentivize home buyers and real estate developers, it is proposed to extend the safe harbor limit from 10% to 20% for the specified primary sale of residential units in this union budget. This means that homebuyers, who buy properties with values below the circle rate by up to 20%, will not have to pay additional tax. Similarly, developers selling units below the circle rate by up to 20% will not have to pay extra tax. This benefit will be applicable from the assessment year 2021-22.

Real estate vs. stocks-
Investing in real estate means you obtain a physical piece of property unlike the shares which are intangible. Notwithstanding the type of real estate investment you make, most investors make returns on monthly rental income or when they sell the property for an acknowledged value. On the other hand, when you buy shares of stock, you purchase a piece of a company. As the company's value grows, your stock value also increases. You can also receive income in the form of dividends on your shares if you hold on to your stocks over time. Well, certainly one has to make a note that the choice to invest in real estate or stocks is a personal preference that depends on your financial situation, risk tolerance, goals, and investment style. Also,

  • Real estate and stocks have several risks and possibilities.
  • Real estate is not as liquid as stocks and leads to require more money and time. But it does present a passive income stream and the potential for substantial appreciation.
  • Stocks are subject to market, economic, and inflationary risks but don't need a significant cash injection and they frequently can be quickly bought and sold.

An option to purchasing physical property is investing in real-estate investment trusts or REITs. REITs are particular companies that own income-producing assets in the commercial real estate space, such as office complexes, retail spaces, hotels and apartment buildings.

Many REITs are publicly traded like stocks and tend to pay more enormous dividends than their equity counterparts. REITs, like stocks, enable you to reinvest these dividends and strengthen your investment value. For this reason, they are quite a popular option for retirement investment accounts.

Real estate investment advantages-

A hedge against market buoyancy-
Owning property can serve as a hedge against stock market volatility and inflation, as home values and rent prices tend to appreciate with inflation.

Tax benefits-
There are surplus tax advantages for homeowners and commercial real estate owners. For instance, adequate homeowners can deduct the mortgage interest paid on the first $750,000 in mortgage debt. Commercial real estate owners can also avoid capital-gains taxes through a 1031 exchange if they reinvest in a comparable property with the funds or use MACRS (Modified Accelerated Cost Recovery System) depreciation to lower their taxable income. (Source- MarketWatch.com)

Constant Cash flow-
Real-estate investments can offer owners a reliable, passive monthly income through the form of rent payments.(Source- MarketWatch.com)

In conclusion, we can say with a degree of certainty that the real estate sector is set to bounce back in 2021 and will, therefore, provide excellent investment opportunities – especially for players who are looking at long-term gains. As the buyer sentiment improves, the fence-sitters will also be encouraged to invest, further injecting liquidity in the sector.

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