Real estate offers terrific returns from time to time and it is tempting to invest your surplus money in it. But many investors get swayed by anecdotal evidence and do not probably realise the hidden risks of real estate as an investment. These are:

 

1. No Database of Return

2. Unregulated

3. Expensive and corruption-ridden

 

There is no data pertaining to returns from real estate, especially within from localities in different cities spread across the country. This makes it impossible for investors to make an informed decision. Moreover, they need to know how returns have been over the years for different regions. Unlike returns from Sensex, no one can offer a single figure of compounded returns of a standard portfolio of real estate. All we have is anecdotal stories of returns.

 

The last two demerits are interconnected. Builders routinely get away with nearly anything, even flouting safety standards and norms. Developers don’t need any qualifications or satisy any requirements to enter the business. Moreover, contracts between buyers and sellers lean heavily towards the sellers. Sometimes, the buyer will need to fork over more money than what he had bargained for because of they are in complete grip of the builders. This dampens demand and sales. Since there is no regulator to frame rules, there is no yardstick for minimum standards either. The deep and corrupt nexus between politicians, officials and builders keeps price levels high which keeps real estate out of reach for many middle class households. 

 

The Union Cabinet has cleared the Realty Bill which proposes the Real Estate Regulatory Authority. This is the first step towards the many steps that is required to make real estate a viable and transparent investment class, much like equities. However, not much is known and in what final shape the RERA will take up and what the rules would be. Some of the rules mooted are banning of misleading advertisements, discontinuation of brochures inviting advances or deposits, mandatory registration before starting a new project, sales agreement required for advances, monetary penalties on the promoter with repeat offences and jail term, and so on.

 

If the real estate regulator finally becomes a reality, will this demerit get eliminated? Unless all consumer issues including grievance redress are translated into effective regulation, with the regulator headed by someone with impeccable reputation, investing in real estate for investment will continue to be dicey. Since corruption is endemic in real estate, it is quite possible that unscrupulous builders would find a way around the laws. Given the difficulty in getting permits, political hold and bribery involved, some of the provisions would be difficult for builders implement too, offering more incentives to find loopholes. It remains to be seen how this would be addressed and whether RERA would be free of corruption and be courageous enough to take on the real issues of real estate. In our view, real estate still remains a risky asset class to invest your surplus money in.