Of late, many investors have decided to quit their real estate investments and the percentage only keeps increasing. A lot of personal experiences and sentiments may be involved from the investors' side. But from a practical point of view, here are a few reasons which are invoking this mass exodus and investors are choosing to invest elsewhere:
Changes in regulations:
Real estate investors were alarmed when Indian currencies were demonetized and even more, when GST was introduced. They feared that these changes could affect their property prices indirectly and sold out their second homes or lands.
Tax changes on rented property:
Earlier, losses on a rented property could be claimed back but Budget 2017 put a limit of 2 Lakh per year. To compensate for losses more than 2 Lakh, owners have no choice but to increase the rent of the property to gradually set off the losses.
Hence, properties were unable to generate profitable income as a part of it is used to compensate for losses which would be carried forward for years. This fact, combined with the tax benefit loss is prompting investors to exit from their real estate investments.
High maintenance and low liquidity:
Every property you must be maintained regularly so that it can be in pristine condition for renting or using when necessary. Apart from this, you also have to pay taxes and utility bills. These maintenances take up too much of time and money as compared to other investment classes. Also, it is hard to sell properties on a short notice and hence it is difficult to liquefy a real estate investment as or when required.
Sometimes, real estate prices tend to stagnate over a period and so investors would sell off their property, especially when it comes to plots. In the data given below, you can see that the real estate index has remained almost stagnant in three major cities of India, save a slight increase in 2016. In such scenarios, investors sometimes dispose of their property holdings so that they can invest in other assets to increase their wealth.
Source: A presentation by JLL India
Further education costs:
In many cases, Indian parents are not equipped enough to bear the higher education costs, especially when the child wishes to travel abroad for further studies. Since education abroad is costly in terms of Indian currency, parents usually take loan against their property or if in case they own a second property, they sell it to fund their kids' dreams.
Attractive returns in other investment assets:
While real estate suffered from price stagnation, other investment tools like mutual funds have picked up well and offer better returns. Some statistics show that ultra HNIs are selling off their real estate properties to re-invest the money into other tools for better income.
In the below graphs, I have compared the NAV among three mutual funds (Reliance growth fund, Franklin India balanced fund and HDFC balanced fund) and real estate housing price index in three major cities (Chennai, Mumbai and Delhi) for the year 2016-2017.