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Rooted in Reality?

Property 'investors' are a very commonly found breed today. I just hope that individuals who don't know what they are getting into stay away from trying to become one

Many of us firmly believe that investing in stocks is a form of gambling (the word satta is embedded deep in our language), but buying property is always an investment. Property 'investors' are a very commonly found breed today.

This was acceptable, in a manner of speaking, when these investors were seasoned builders and property speculators, but now I find that ordinary people, even if they have perfectly adequate houses of their own, have started buying property for investment alone. The other day I ran into an acquaintance who has pulled out a lot of money out of stable fixed income assets and put them into something he described as a 'pre-launch opportunity'. And this is a person who thinks equities are too risky! Certainly, it must have been a great opportunity, especially for the builder who sold it to my friend.

There is a general idea around that real-estate as an investment (as distinct from buying for one's own residential and commercial needs) is suitable for just about anybody. It's not. Quite apart from the fact that real estate prices today are arguably equivalent to the Sensex being at about 20,000 points, there are a few basic characteristics that any good investment vehicle must have, none of which appear to be possessed by real estate.

Two key characteristics of an investment-worthy asset market are transparency and liquidity. The real estate market fails miserably on both these counts.

Take transparency first. Quality of information is the key to any investment decision. However, whatever you hear about a real-estate investment usually comes only from the developer who's trying to sell it to you. Even if you try to check around, you will always have information sources whose commercial interest lies in booming markets and rising prices. Unlike most financial assets, there's no trustable and regulated way of discovering prices or even basic information about the real estate markets.

Here's an example of what high quality information real estate information is all about. The other day I came across an article about the deflation of the housing bubble in the US. This article mentioned, in passing, that the number of houses that have been on sale but unsold for more than 90 days had gone up by 0.7 per cent over the previous month. Frankly, I was amazed at the quality of the information that this implies. In sharp contrast, the state of the real estate market in any area in India is whatever property dealers and valuers appointed by banks (who are usually close buddies of the property dealers) say it is.

Coming to liquidity, the story is even sadder. Real estate assets are notoriously illiquid when prices start falling. When there is a run on property, it's not that you get to sell at a lower price-instead you generally can't sell at all, except perhaps at a desperate price. In stock market terms, the 'impact cost' of selling in a declining market can be huge.

As the country's real estate market hurtles towards an unknowable future, one can hear plenty of warnings. I just hope that individuals who don't know what they are getting into stay away from trying to become real estate investors.