If you talk to folks and pick up anecdotal evidence, you would learn that a lot of money seems to have been made by investing in real estate in India. Those of us who live in India constantly bump into real estate brokers driving fancy cars and are regaled by stories of farmers selling their land for millions, and friends whose investment properties have quadrupled in 2 years! I had my team at Cians Analytics take a deeper look at the real data, and to compare and contrast what returns different asset classes have given in India over the last 23 years (since the economic liberalization of the country starting in 1991).

Asset Returns in India (1991-2013)

The results are presented in the attached paper (above), but I am summarizing the key points below:

• Unlike in the US, where a Robert Shiller (arguably the most knowledgeable commentator on the real estate markets) has posited that real estate is at best an asset that barely covers inflation, in India the data looks quite different. In fact, in India, it appears that real estate returns have comfortably exceeded all other asset classes. That being said, our view is that one should be very careful about how one invests in the real estate sector. While real estate returns seem to have been high on average, as an asset class it is highly illiquid and in India comes with a substantial amount of credit risk (if buying real estate from a developer) and is plagued by substantial black/grey market dealing. Honest investors are at a disadvantage and usually can’t exact full value and returns.
• The stock market has given a healthy return on an absolute basis (~15.5 % per annum), however if you factor in inflation, the real return is only ~7.1% p.a.
• That also begs the question of whether investors are getting adequately compensated for their risk by investing in India. If the real return in Indian equities is only 7.1% per annum, does it make sense for a foreign investor (for example a US investor) to take on the additional risk of investing in India rather than investing in their local markets. During the period of possibly the highest growth in the Indian economy, the Indian equity market returned only 7.1% on a real basis, while the US equity market returned 7.3% — basically implying that investors who chose to invest in India got no benefit for the extra risk they took on by investing in India (note that this holds true without even factoring in currency devaluation which would have made Indian returns seem even more unattractive)
• Obviously, investment decisions are not made by looking in the rear-view mirror, but history can provide pointers for how asset classes react to different external conditions and stimuli

Aman Chowdhury. May 2014.