The Knight Frank Wealth Report 2017, released recently, ranked Mumbai as 21st in the ‘City Wealth Index’ ahead of Toronto, Washington DC, Moscow. The report tracks the growing super-rich population in 125 cities across 89 countries and provides a unique perspective on the issues that are influencing UHNWI investment and lifestyle decisions. It is important to analyse where these rich are investing. Here, we take a look at where Mumbai is investing.
In India, buying real estate is not just an investment, but a dream goal for many. Most people are happy and satisfied that they own a physical asset which they can pass on to their children. However, real estate is no longer as coveted an investment as before. It is important to understand why, real estate which was a good investment avenue a few years back does not hold the same sheen now.
In the past few years, the prices of real estate have stagnated and in metros like Mumbai, a huge amount of real estate lies unsold. Many of the constructions are at halt for various reasons and investor’s money is locked in them. This situation of a huge supply and lesser demand indicates the lower interest in real estate. In addition, post demonetisation, in absence of cash liquidity, there has been a distinct reversal in investments from physical assets like real estate to investment in financial assets like mutual funds.
Real estate had a great run from the 1990s to 2008, and most people who talk about real estate giving great returns, are talking from their experience during this phase. However, post 2008 the real estate market has performed abysmally. As per the Real Estate Property Index, the average returns across all cities in India, from 2007 to 2015 have just been 7.39%. p.a., and for investments after 2014-15, there has been hardly any growth. These returns which are almost in line with inflation, prove that capital appreciation in property is a myth. In contrast, the average Sensex returns from January 2009 to January 2018 were much higher at 15.87% p.a. Thus, the equity markets have outperformed the real estate markets by a great margin from 2009 to 2018, when it comes to capital appreciation. Therefore, though people view real estate as a source of wealth creation and value appreciation, in reality the picture is very different.
Another compelling reason for people to purchase real estate, is to get rental income (if bought as an investment). Over the past few years the rental yields have been in the range of 2.5% – 3% p.a. excluding tax on rental income and maintenance charges. If we consider maintenance and administration part, majority of rent collection goes towards maintaining the property. Therefore, though people view real estate as a source of wealth creation and value appreciation, in reality the picture is very different.
Having understood the historic returns and the myths around investing in real estate, let’s see how your money would grow if you had Rs 5 crore to invest?
|Particulars||Amount Invested (Jan 2009)||Value as on Jan 2016|
|Property Investment||Rs 5 crore||Rs 9.20 crore|
|BSE Sensex||Rs 5 crore||Rs 19 crore|
The Knight Frank Wealth Report 2017 also supports this view. The report says, “The millennial UHNWIs in India focus on capital growth compared to the older generation who laid emphasis on wealth preservation”. Investment in real estate in today’s scenario does not grow capital. There is a money erosion in real terms when inflation is considered. More and more people are believing that mutual funds grows their capital. Amongst our clientele, we have observed an increasing preference for mutual funds over real estate.
Data provided by Association of Mutual Funds in India (AMFI), proves the increase in investments in mutual funds in India. As per data:
- Investment in mutual funds has been continuously increasing in the past 2 years. Equity mutual funds registered a record inflow of Rs 20,362 crore in August 2017 on strong participation from retail investors.
- Assets managed by the mutual fund industry have grown from Rs 12.75 Lakh crore in December,2015 to Rs 21.26 Lakh crore in December, 2017, representing growth in assets of 67% on an absolute basis and 29% annualised.
- Similarly, if we look at the growth of equity-oriented assets, Equity mutual fund assets have grown from Rs 4.06 Lakh crore in December,2015 to Rs 7.71 Lakh Crore in December, 2018, representing a growth of 90% on an absolute basis and 38% on an annualised basis.
- As of September 2017, the industry received about Rs 5,000 crore per month through SIPs.
All these statistics highlight the increase in investments in Mutual Funds in the past 2 years. While until now, UHNIs invested money in real estate, there is a clear shift towards investments in mutual funds. Those opting to buy real estate do so for their own accommodation and not as an investment.