Small cap stocks: Buying an apartment on the outskirts of a metropolitan city is like buying small cap stocks : Nithin Kamath

As India is in the midst of a real estate boom due to low interest rates, Zerodha co-founder Nithin Kamath said real estate is unlikely to beat inflation and housing costs. long-term interest. For those looking to buy property in Tier II and III cities and on the outskirts of a metropolitan city, he says it’s like buying a small-cap stock — a high-risk strategy.

“Buying where prices have not yet appreciated (in levels 2 and 3, on the outskirts of a metro) can mean a good return on investment (ROI). But it’s like buying a small cap stock , hoping it becomes large-cap; only a few do. It’s a high-risk strategy and therefore the capital allocation should be lower,” Kamath said.

In a Twitter thread, he argued that for real estate returns to outpace inflation, the price must rise at least 10% per year to beat inflation or double every 7 years. “For the price of the property to double every 7 years, rents must also increase by the same amount. This does not happen in most places in India. For example, if an apartment costs Rs 1 cr can be rented at Rs 20k/month. For the price to go to Rs 2 cr, ideally the rent should also go to Rs 40k/month.”

The Bengaluru-based billionaire said that just like stocks, property prices can also rise without good fundamentals. “Usually when that happens, stocks, real estate, crypto, etc., prices don’t stay there for too long. For real estate, rental yields are probably the best measure of fundamentals,” he argued, adding that real estate is illiquid, as are private market valuations.

“The actual price compared to the last traded price that sellers claim could be way off. The other risk is that since the price is fixed and prepaid, you cannot profit from price fluctuations through an SIP like in stocks or MFs.

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The stockbroker said that at today’s prices, real estate is unlikely to beat inflation and long-term interest costs. “A home will provide financial and emotional security, but the financial returns as an investment will not be enough to cover retirement as in the past,” Kamath said.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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