investment in property

I have noted how property prices are a delusion as prices were firming up in 2012. Later in 2013 prices appeared too high compared to cash flows associated with them. And in 2016 I noted that rentals were not aligned with prices in India. Recently, someone asked me why I do not invest in property. This is what I said: 

There are two caveats before I begin though. First is that I am biased towards equities. Naturally, I will banish everything else. But then so is everyone; aren't all biased too? Second, I don't have an edge in the game. My knowledge on property market is limited; and I neither fancy nor am I interested any further.

There are at least five reasons why I don't deal with the property market. 

1) I buy assets based upon an intrinsic valuation that I carry out. For a real property, say an apartment in a building, the cash flows are rentals net of maintenance costs. As noted in my earlier posts, rental yields have been too low in India. With a 2% yield for instance, the investor will have to say a prayer if the expected returns, including capital gains, are to be reasonable. I do not indulge in hoped-based-only instruments. Of course, we need hope all the time in life; we always hope that everything goes well. But while investing, I feel better when the probability of earning expected returns, based upon analysis, is higher, and then coupled with some hope that prices will come along with value at some point. There is always some meaningful work behind hope. 

Dividend yields on quality stocks in India aren't too high either; less than 2%. Yet, I prefer stocks. The reason is that mispricing in equity markets helps us pick stocks at prices we like. I don't find such privilege in property markets. Inefficient equity markets are investor's friend. 

2) Investing in real properties is highly concentrated with no regard for diversification. Usually for me it is not a problem when I have to buy stocks because of the comfort level I get based upon my analysis helped by the price I get to pay. Absent such comfort, property market becomes even more dangerous. For instance, with say, Rs.20 m, I would rather pick five stocks than throw the cash for one single apartment. The hope-based investment becomes prominent, and you will have to desperately seek a greater fool for your expected returns. 

3) The liquidity in equity markets is another reason why I prefer them. It takes time to first find a seller, and then to find a buyer in order to complete a property transaction. Heck, it is too much of a hassle. 

4) Tax regulations are too kind to equities in India, where as of now, there are no taxes on long term capital gains. And dividends are, generally, tax free. The difference could be enormous compared to the property especially when the transaction value is usually large. 

5) Then there is the fifth reason why I don't deal with the property market. I do not know it yet though.

Beware that you can defy equity markets; property markets have the capacity to defy you. The game is on.