Don’t Be Like Rakesh Jhunjhunwala

Jan 06, 2017 | 03:52 PM IST

In 2005 celebrity investor Rakesh Jhunjhunwala wanted to buy a home in Mumbai. The cost of the home he wanted to buy was Rs.27 crores. To raise money for this purchase Mr. Jhunjhunwala sold a part of his stake in Crisil worth Rs.27 crores. All went well, he raised the money and bought the new home. But here comes the catch, today, 10 years down the line, the value of his home is Rs.50 crores while the value of the shares he sold is Rs.700 crores. In short, Mr. Jhunjhunwala lost more than 650 crores.

The point is - Equity investment has the potential to outshine any other form of investment. Even real estate.

The Demonetisation Effect

Ever since demonetisation has been announced, how this move is a blessing for real estate investors has become the talk of the town. But has demonetisation been of any help to the home buyers? Sadly the truth is exactly the opposite. In fact, demonetisation has brought about a tricky situation upon the builders and consumers alike.

The immediate impact of demonetisation was that it put banknotes of 500 and 1000 denominations out of business. Thus real estate, where most of the transactions are carried out in a combination of white and black money, has suffered the most. But builder’s misery doesn’t necessarily translate as a respite to the consumers. Upon analysing the prevailing situation here’s the picture which emerged.

Builder's Dilemma

Projects which are in their initial stage or halfway through have to suffer the maximum brunt of the present situation. Real estate projects largely move on the partial payments from the customers and money borrowed from the market. Since demonetisation has come into force both these sources have dried down due to paucity of funds. Moreover, as the builders borrow the funds on heavy interest rates (sometimes as exorbitant as 20-24%), in the current uncertainty they would prefer to stay put instead of putting their money on line.

Completed Projects: A Safe Bet

Builders who have their projects completed or are nearing completion have a great advantage at this time. As their projects are near completion - it's a given that most of the homes in their projects are already sold and those few unsold units will now fetch good price as ready-possession home would be preferred by buyers. The apprehension of under construction coming to a standstill due to to lack of liquidity will play on the buyer’s mind.

Furthermore, another reason why rate drop is unlikely is that since last 4 years property rates have not been at par with the inflation rate. In other words, properties in 2016-17 are being sold at 2012 rate. Thus additional rate cut, despite the impact of demonetisation, looks very unlikely.

Why Wait? Explore New Investment Instruments

Taking into account these two scenarios it looks like a writing on the wall that real estate is not a smart investment option at this point. So it only makes sense to use this opportunity to explore other investment mediums while the confusion in the real estate sector settles down.

A Better Investment Option - The Stock Market

Stock Market is one of the smartest investment options available for the retail investors. The present time is particularly most opportune time as the market has considerably slipped due to significant global events. The buying opportunities are aplenty and investment in good stocks will bring lucrative rewards in the near future. It makes sense to put your money in the investment instruments which will give a better upside to your money than savings account or fixed deposits.

Many blue-chip stocks as well as mid-cap and small-cap stocks are available at a discounted price since the market has opened up owing to the impact of demonetisation.

Market experts and analysts have already predicted that the beginning of 2017 where Union Budget, GST meeting and RBI meetings are scheduled will be good for the market. As the demonetisation effect is settling down, the favourable policy changes by the government and RBI will help market take an up swing.

Conclusion

The real estate investors who are cornered by the present situation can look at this period as a blessing in disguise. If they chance upon the present buying opportunities in stock market they will be laughing their way to the bank when market rises in the first quarter of 2017. And when they sell their appreciated stakes they will be in a position to consider better prospects in real estate. Isn't that a win win situation?

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Niveza Editorial Desk : We are a team of stock market nerds trying to stay ahead of the herd. We spend our grey cells everyday to a pave a smooth road for our clients in the shaky world of stock market. While...
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