Gold rush continues to dent realty growth

Indians are always susceptible to investing in gold and real estate, irrespective of the market condition.  However, when there is a slump in any of the two mentioned basic investment options, people’s first choice would be to park their money in yellow metal, as unlike real estate, gold possesses better liquidity and provides long-time investment option too.

So, when the gold prices slumped in the international markets to August 2011 level, the bullion value in domestic markets too reached its nadir, though analysts say, it would be difficult to predict the lowest point of the current slump pattern.  

This means, if one buys ornamental gold today at Rs 2711 per gram, he would be buying it at the rate existing two years ago. No wonder, we are witnessing a heavy rush in all leading jewellary shops across the state. However, the slump has affected small time jewelers, who have to sit on the gold purchased at higher rate and have no option but to offload it at much lower rate.

So, it is natural that people in India, who are known for their affinity towards buying gold, are now shopping for the yellow metal. Some are even pledging old ornaments or taking loan to buy new gold thinking that the slump is temporary and gold prices will shoot again in future.

As investment in gold and real estate is inter-related, the slum in gold has come as God sent for people who wanted invest in real estate but were reluctant to put their money in the highly volatile and unpredictable real estate in India.

As there are low or negative returns on real estate, the demand for gold and other commodities typically is expected to increase, and that is what happening now, according to a few real estate consultants in Chennai.

According to Anuj Puri, Country Head Chairman, JonesLang LaSalle India, ”Indian real estate is definitely not the best route for short-term investors. When it comes to opportunistic trading, gold is doubtlessly a far more suitable asset class – not least of all because one can purchase it in small or large amounts and liquefy it quickly. Turning a profit with gold is really only a matter of timing the market.

Even retail investors are drifting away from the equity market investments to safer asset classes such as gold, according to industry sources.

However, the recent fall in gold price has raised questions whether the returns given by these relatively safer investments are likely to sustain. While the gold price has fallen 20% from the peak, are the real estate prices also likely to correct is the question asked by the most.

However, an analysis done by Karvy's research team on 20 years data of the Hong Kong real estate index and gold price showed that the prices of both have 81% correlation.

So, a fall in gold prices could prompt more money for precious metal and less for real estate, Karvy Stock Broking pointed out. This means when investors eye gold to make money, real estate will take the back seat of investment option, which in turn will make homes affordable for prospective buyers.

Experts also view that the correction between real estate and gold will make people sell their real estate investments and invest in the yellow metal. Will there be a large scale correction in realty prices if the prices of yellow metal further go down? Only time will tell.

With Gold Prices Sinking, What Is The Future Of Indian Real Estate?

Will real estate prices in India too tank like Gold? Unlike gold there are not much external parameters which  can decide the fate of residential real estate in India. Though international markets ‘sentiments’ sometime play havoc on Indian stocks, there will not be any follow up action on real estate but one can expect marginal decline in real estate investments due to gold rush.

Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India feels that, “With gold prices currently on the descent, many investors are asking themselves if residential real estate prices will follow. Gold and real estate are the two primary investment routes for retail investors in India, so this is definitely a valid question to ask.”

The performance of residential real estate as an asset class is doubtlessly dependent on the macro-economic factors that also dictate the performance of other asset classes, including gold. Nevertheless, the correlation between gold and real estate prices is not as distinct as one may at first assume.

Price movements in the real estate sector are the result of supply and demand. This is true for gold as well, but the demand drivers for real estate are not the same as for precious metals. Though, in investment terms, they technically fall under the category of asset classes, the demand for residential property stems from the desire for home ownership that is hard-wired into the Indian psyche. It is demand from end-users that dictates investors’ appetite for residential property.

In India, precious metals are an investment class that most people will consider after this basic desire is satisfied. Moreover, the prices of precious metals are not location-specific – they rise and fall uniformly. This is hardly the case with real estate, which performs differently at different times in different cities and micro-locations.

In a vast country like India, it stands to reason that various markets will display varying pricing dynamics. Real estate valuations also range from rational to irrational in different areas within the same cities, depending on the levels of supply, demand and investor activity. At the same time, other cities continue to remain uniformly rational because they are largely end-user driven.

How Good Is Residential Real Estate For Investment Today?

There is no one-size-fits-all formula for the viability of residential real estate as an asset class for investment. Different investors have different levels of expertise, experience, market knowledge and risk appetites when it comes to different asset classes. Those with insufficient expertise in stock trading are not likely to see satisfactory ROI from their activities on the stock market.

Likewise, investors who lack the requisite knowledge and research to make winning real estate investment decisions will not meet with much success in this vertical. Real Estate investors who have sufficient market knowledge or work with experienced real estate consultants will not fail to see lucrative returns on their investments.

Three parameters for successful investment in any asset class are when to invest, how much to invest and when to exit. In real estate, three additional variables are where to invest, into which size and configuration, and in which location.

Residential Real Estate Investment - Short-Term & Long-Term Outlook

In the short term, residential real estate prices in different cities will either remain steady see minor upward or downward fluctuations. In the long term, they will rise again. The fundamentals of the India real estate story are extremely strong. Even in this turbulent economic environment, India remains the cynosure of interest by global MNCs and investors who see the limitless potential of a young, growing economy, a wealth of highly trained workforces across the manufacturing, IT/ITeS and services industries. All this translates into assured job creation, and therefore demand on the residential real estate market.

However, Indian residential real estate is definitely not the best route for short-term investors. When it comes to opportunistic trading, gold is doubtlessly a far more suitable asset class – not least of all because one can purchase it in small or large amounts and liquefy it quickly. Turning a profit with gold is really only a matter of timing the market.

Of course, this applies for residential real estate, as well. However, thanks to a conservative banking system that makes ‘flipping’ extremely unattractive, residential real estate as an investment class is a very different ballgame in India. More and more regulations are being brought in to subdue the appetite for speculation in this sector. Also, the lowest entry point is definitely much higher than for gold. Finally, it requires a minimum ‘incubation’ period in order to bring ‘appreciable’ returns.

Even after one has satisfied all the basic investment criteria - good location, right size and configuration, right entry point and right entry price - one needs to stay invested for the mid-to-long term in order to garner the best possible returns. As a general yardstick, an investment horizon of 3-5 years is ideal.