Commercial real estate looks better than residential.
Samvat 2066 was an average year for equities. But, commodities, led by silver and gold, and residential real estate, outperformed returns among all asset classes. Going forward, equities remain attractive, but there is a sense of caution for gold in the short term. Commercial real estate is expected to perform better than its residential counterpart.
In Samvat 2066, returns from equities were 20.6 per cent (Sensex), cotton gave the highest return, of 87.5 per cent, followed by silver at 40.3 per cent and gold at 24.9 per cent. Residential properties gave returns of 30-50 per cent, depending on the location. If one goes by the past five years of returns, gold and silver have clearly outperformed equities. Among other commodities, agriculture performed better than metals, though they returned slightly less than equities.
However, in the past one year, leading global agri and metals indices have outperformed equities (see table).
Case for equities
Going forward, ‘slow and steady wins the race’ seems to be the theme. ENAM Group Chairman Vallabh Bhansali said: “If the equity market rises steadily, it has the potential to give above-average returns in the coming Samvat year. Given where interest rates are, the next six months look very good for equities in any case.”
ICICI Prudential Asset Management Deputy Managing Director Nilesh Shah advises patience. He says: “India is benefiting from the wealth effect, through appreciation of land, gold and equity prices. If the government can raise productivity across the economy through better governance, this wealth effect can be sustained and not get converted into a bubble. Investors have to learn the art of investing. Even God cannot deliver a mango before 12 years. Don’t expect markets to deliver returns prematurely.”
ENAM Group’s Bhansali also believes gold will continue to be an asset class to reckon with, given the currency problems the world is facing.
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With a five-year return of 186 per cent compounded and 227 per cent for silver, bullion has been a best-performer asset class. Equity returned 163 per cent. Commtrendz Research director Gnanasekar Thiagarajan said: “In India, commodities as an asset class have not gone beyond gold and silver. While in the coming months some exchange-traded products in commodities may be launched, bullion would remain a preferred commodity for allowing investments from a policy perspective.”
On specifics, he said: “Gold has risen a lot and, hence, those who want to invest can wait for correction.” His logic is that investors will soon realise that second dose of stimulus or quantitative easing (QE2) will prove good for the US and result in growth, which could reduce gold’s appeal for hedging, and profit-booking will bring a much-needed correction here. He does not rule out a $100 correction from the current level.
Property
Returns from property have been good in the past five years. However, there is no organised data available for that. If one goes by the index of residential properties announced by the National Housing Bank, its index has risen by 100-150 points on an average from 2007 (base year—100). Chennai gave 83 per cent returns in the past three years, Mumbai 60 per cent, and Delhi returned just 10 per cent, with the Delhi index at 110 this June.
Knight Frank India Chairman Pranay Vakil says: “The Samvat year that is ending has given decent returns in residential properties in general. In the past, commercial properties were giving good returns and, hence, there were huge additions to commercial realty stocks after 2007. Now, residential stock is coming up. In the coming months and year, fresh supply will cap the returns.”
| ALL THAT GLITTERS MAJOR EQUITY INDICES AND COMMODITIES Returns (in %) | |||||
| Date | 1-Nov-05 | 17-Oct-09 | 4-Nov-10 | 1 Year | 5 Year |
| Samvat | 2061 | 2065 | 2066 | ||
| Commodity | |||||
| Cotton Shanker-6 (Rs /qtl) | 4,865.00 | 6,524.00 | 12,232.00 | 87.49 | 151.43 |
| Silver .999 (Rs / kg) | 11,795.00 | 27,475.00 | 38,550.00 | 40.31 | 226.83 |
| Gold 99.50 (Rs /10 gm) | 6,895.00 | 15,800.00 | 19,735.00 | 24.91 | 186.22 |
| Sugar M30 (Rs /qtl) | 1,937.50 | 3,172.50 | 2,846.00 | -10.29 | 46.89 |
| Equity Indices | |||||
| Sensex | 7,944.10 | 17,326.01 | 20,893.57 | 20.59 | 163.01 |
| Dow Jones | 10,406.77 | 9,995.91 | 11,215.13 | 12.2 | 7.77 |
| Global Commodity Indices | |||||
| S&P GSCI Agric Indx Spot | 189.93 | 325.02 | 467.24 | 43.76 | 146.01 |
| London Metal Index | 2,106.40 | 2,932.00 | 3,830.80 | 30.65 | 81.86 |
| Reuters/Jefferies CRB Index Spot | 280.79 | 275.7 | 308.19 | 11.78 | 9.76 |
| S&P GSCI Energy Index Spot | 232.19 | 263.11 | 282.52 | 7.38 | 21.68 |
| Compiled by BS Research Bureau | |||||
At today’s high prices, deals have fallen. A thinly traded market is not seen as a benchmark for prices. Vakil has a piece of advice for investors looking at real estate. He says: “Except actual users, investors should be cautious while investing money in residential property, especially in cities like Mumbai, but commercial properties could give compounded returns of 50 per cent in the next three years and tenant-occupied properties will certainly give higher returns.”
In India, the number of people investing in equity is much less than those investing in gold and those buying real estate. Still, to get higher returns, advisors allocate more for equity.
Milestone Capital Managing Director Ved Prakash Arya says: “Over 50 per cent of the portfolio should be invested in equities and one may consider 10 per cent investment in unlisted firms through private equities, five to 10 per cent in bullion, 20-25 per cent in pre-rented real estate and the rest in debt.”