When investing in real estate, Kamath asked investors to note if the property yield is greater than inflation.
If the yield is negative, the price has to go up by at least 10% every year to beat inflation, or the price has to double every seven years, Kamath tweeted.
“For the price of the property to double every 7 yrs, the rents also have to go up as much. Not happening in most places in India," he further said.
Citing an example, the Zerodha CEO said, “If a flat costing ₹1cr can be rented at ₹20k/month. For the price to go to ₹2 cr, ideally rent has to go to ₹40k/month as well."
Like stocks, he said, real estate prices can also go up without good fundamentals. “Usually when that happens, stocks, real estate, crypto, etc., prices don't stay up there for too long," Kamath said.
The Zerodha co-founder added, “For real estate, rental yields are probably the best measure of fundamentals."
He also said that real estate is illiquid, just like private market valuations. “Real price vs last transacted price that sellers claim could be way off," he noted.
The other risk, Kamath described, is since the price is fixed and paid upfront, one can't take advantage of price fluctuations through a Systematic Investment Plan (SIP) as in stocks or mutual funds.
“Of course, buying where prices haven't already appreciated (in tiers 2 & 3, outskirts of a metro) can mean good ROI," he said.
He added, “But this is like buying a small-cap stock hoping it becomes large-cap, only a few do. It is a high-risk strategy and hence capital allocation should be lower."
Meanwhile, housing sales rose 60% annually in January-June 2022 across eight major cities at 1,58,705 units, the highest half-yearly demand in nine years, mainly driven by lower base effect as well as mortgage rates, according to Knight Frank India.
Housing sales stood at 99,416 units in the first six months of 2021, the consultant said in its 17th edition of half-yearly report 'India Real Estate: Residential and Office Market H1 2022'.
Knight Frank India highlighted that the residential sector has recorded a 9-year high sales volume in January–June 2022. The previous high was recorded in the first half of 2013, when sales were at 1,85,577 units.
Hyderabad, Mumbai and NCR also witnessed moderate increase in their rental values, whereas the rental values in Chennai, Ahmedabad and Kolkata remained stable.
