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What makes real estate investments unique?

By iTrust Financial Advisors
November 06, 2009 12:38 IST
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In the past few years, real estate has become a popular asset class for Indian families to invest in, over and above their residential housing needs. The expectation is that an investment in buying a property as a financial asset will be a sure path to wealth creation.

Here we share with you the characteristics of real estate as an investment.

Real estate has a combination of characteristics that are not available through other asset classes, thus making it somewhat unique as an asset class.

Protection against inflation: A property investment can offer the buyer a good protection against inflation. In this regard real estate is like gold, in that it usually retains its intrinsic value. However, unlike gold, one can earn income on real estate through rental income.

Depending upon the existing price level in the economy, one can increase the rents in times of high inflation thus retaining the purchasing power of one's rental income. In addition, real estate offers the prospects of capital appreciation as well.

Tax incentives: All around the world, different countries offer different incentives to buy real estate. For instance, it is very common for governments to offer some kind of tax subsidy for a property purchased for residential use (whether by self or let out). In some countries there are tax advantaged trusts through which investors can own real estate (REITs), and these are expected to emerge in India as well.

Diversification: There are many different categories of real estate investments. The most commonly understood in India is residential, but other types that are also growing are commercial (office buildings), retail (malls and shops), industrial (factories and warehouses) and lodging (hotels). Each of these has different drivers and different return characteristics.

Maintenance costs: Finally, if you have invested in any of the above type of properties, it is likely that you will have annual maintenance costs (cleaning, painting, ongoing repairs) and the occasional capital expenditure to upgrade the property every few years. Investments such as stocks and FDs don't have these associated expenses.

Don't just blindly invest into real estate just because you expect prices to go up. Understand the above characteristics, and identify what role you want your real estate investment to play in your overall asset portfolio.

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